BANKS MAY GET A SLICE OF FOREX PILE

LIFELINE FOR LIQUIDITY-HIT OVERSEAS BRANCHES

A COMMITTEE led by the finance secretary Arun Ramanathan has made out a case for using a part of the country's foreign exchange reserves to provide liquidity support to Indian banks for their overseas operations.
    Last week, the Reserve Bank of India (RBI) governor said that the monetary policy authority would take conventional and unconventional measures to ensure financial as well as price stability and growth.
    The committee, appointed by the finance minister to assess the liquidity situation, has said that a portion of India's forex reserves, aggregating $273 billion, could be used to invest in securities such as bonds issued by foreign offices of Indian banks, said a person familiar with the issue.
    This will boost resources of these banks at a time when access to lines of credit or funds from overseas banks, with whom
    Indian lenders have arrangements, have been severely curtailed. The forex pile, which could be utilised for this purpose, could be in the range of $1 billion to $5 billion. The seizure of financial markets world-wide has left many Indian banks with branches in some of the major financial capitals struggling to raise funds.
    The other measures suggested by the committee include opening a refinance window for small- and medium-enterprises. The committee is said to have indicated that policy makers would have to be mindful of the large foreign debt repayments which are due next year. The government and RBI are expected to take a view on the recommendation soon.
    There is a precedent for using a part of the forex reserves in this manner. Following an announcement in the 2007-08 Budget, the India Infrastructure Finance Company (IIFCL), in which the government is the dominant shareholder, has formed a company — IIFCL (UK) — to use up to $5 billion of the reserves to help Indian corporates finance their capital expenditure. The plan is to finance imports of capital equipment by the IIFCL subsidiary, with the entire transaction being done overseas to ensure that there is no impact on domestic liquidity.
THE GAMEPLAN
The committee has proposed digging into forex reserves, aggregating $273 billion, to invest in securities such as bonds issued by the foreign offices of Indian banks
NOT THE FIRST TIME
After 2007-08 Budget, India Infrastructure Finance Company formed an arm, IIFCL (UK), to use up to $5 b of the forex kitty to help cos finance expenditure abroad
HAPPIER RETURNS
This time, RBI will invest in bonds issued by IIFCL (UK), with govt assuring that returns would be higher than those generated by RBI on deployment of its reserves RBI's dollar selling depletes forex stockpile by $35b
    INthis case, RBI will invest in bonds or securities issued by IIFCL (UK), with the government providing an assurance that returns on this investment would be higher than the returns generated by the central bank on deployment of its reserves. In 2007-08, the returns on India's foreign exchange reserves were 5.1% (4.8% net of depreciation) compared with 4.7 % a year ago.
    Over the past few months, the forex stockpile has depleted by $35 billion as RBI had to sell dollars to stem the erosion in the value of the currency caused by foreign portfolio investors selling stocks and pulling out their money. Till mid-year, the debate in India centred around how to utilise the relatively large hoard of forex reserves to increase earnings. But, RBI was treading cautiously, saying, unlike other countries like China, which have huge reserves (over $1 trillion at last count) due to a current account surplus, India still runs a current account deficit.
    Bankers say that it makes sense to provide a funding line to Indian banks' overseas operations, considering that their predominant business is financing the needs of Indian corporates which are expanding their operations globally or to overseas subsidiaries of Indian firms. There is very little money available for Indian banks which have foreign branches to draw upon from and the proposal could go a long way in easing their funding needs, a senior banker said. Banks had raised this issue with the central bank last week. In fact, the liquidity squeeze had resulted in some of these banks buying dollars in India and sending them abroad to meet their overseas requirements.
    Many liquidity boosting measures were announced by RBI and the government before the committee finalised its report. The committee includes, besides the finance secretary, IBA chairman TS Narayanswami, UTI AMC CMD UK Sinha, L&T CFO YM Deosthalee and Sidbi CMD RM Malla.
    shaji.vikraman@timesgroup.com