RBI Considers Utilizing Foreign Bonds to Support Rupee

India's Central Bank Weighs Plan to Draw Capital Inflows with Foreign-Currency Bonds

The Reserve Bank of India is considering a proposal to allow state lenders to sell foreign-currency bonds, a move that could help draw capital inflows and support the beleaguered rupee. According to people familiar with the matter, RBI officials have discussed a plan that would see lenders issue foreign-currency bonds with five-year maturities. However, discussions are preliminary, and no decision has been made.

India has a history of using similar tools to attract capital inflows. In 2000, State Bank of India raised $5.5 billion through India Millennium Deposits, issuing bonds denominated in dollars, euros, and pounds. In 1998, SBI raised more than $4 billion through the Resurgent India Bonds, which were tax-free securities.

The central bank is also considering offering foreign-exchange swaps to participating lenders to hedge currency risk. Under this structure, banks would be able to buy foreign currency from the RBI at a future date at a pre-determined price. This would allow them to offer more attractive yields to investors.

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The RBI has not commented on the matter, but state-owned lenders report to the finance ministry, which often coordinates with the central bank on policies and measures to stabilize the currency. The rupee has weakened close to 6% against the dollar this year, the worst performance in Asia.

Balance of Payments Deficit Worsens

The rupee's weakness is partly due to India's balance of payments deficit, which is expected to reach $68 billion in the year ending March 2027, according to Nomura Holdings Inc. economists. The deficit has been exacerbated by stock outflows, which exceeded $5 billion last month. The central bank's anti-speculative measures rolled out in March and April briefly helped the currency, but pressure is building up again as oil prices remain elevated, exerting strain on the fuel-importing nation's trade deficit.

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Nomura's Warning

Nomura economists, including Sonal Varma, have warned that any new measures to plug the balance of payments deficit would need to account for higher dollar deposit rates globally. They suggest that a higher subsidy from the RBI may be necessary to make the plan attractive. The RBI and government are expected to provide more clarity on whether they will follow through with such measures.