Reserve Bank of India governor YV Venugopal Reddys opening salvo of capping the interest rate offered by banks on non-resident external deposits to 100 basis points over Libor was long overdue. In a single fell swoop, the RBI has ensured that cross-border dollar deposits will not find India an attractive enough destination. The move comes on the eve of the maturity of the $5.5 billion Resurgent India Bonds (RIBs). And given this backdrop, it would be right to interpret the RBI move as a signal that it is not particularly keen that the RIBs are retained within the system. The RBI, on its part, has also been grappling with the fact that the headroom it has with regard to sterilisation and neutralising the attendant rupee liquidity, is fast reducing. There are some who believe that the RBIs latest move will put pressure on rupee-liquidity if a substantial portion of the RIBs is redeemed. Some even point to the fact that last Friday, the outflow at the RBI repos window was a mere Rs 9,000 crore to suggest that on huge RIB outflows, the situation could worsen. It is pointed out that given the good monsoon, booming stock market and the expected upward revision on RBIs part of GDP growth, there could an uptick in credit offtake in the second half of this fiscal. Furthermore, that food-credit too may pick up with the Food Corporation of India becoming active in an election year leading to sharp increase in demand. With slack deposit growth, this could constrain liquidity further.
But there are better ways of ensuring liquidity than using the arbitrage window. Somewhere in the debate, it has been forgotten that the RIB was an instrument used by the political establishment to tide over sanctions imposed after the nuclear tests in May 1998. SBI was merely a channel to raise these resources. If there is heartburn over the latest RBI move, look no further than the weekly statistical supplement. The central bank clearly qualifies by stating that time deposits within the bank system is inclusive of the Rs 17,945 crore on account of proceeds from the RIBs since August 28, 1998. There is also a mention of the Rs 26,662 crore via the Indian Millennium Deposits since November 17, 2000. Which only means that these are at best one-offs, and that the banks must see them as such.