India's multi-million-strong diaspora is patriotic up to a point. In fact their patriotism may amount to 5 or 6 percentage points of annual investment returns when it comes to providing the hard currency needed to revive the rupee. After announcing short-term measures this month to put a floor under the falling rupee, Indian authorities are contemplating longer-term steps to plug a deep current account deficit to help prop up the currency.
New Delhi is considering the time-tested recipe of raising money from non-resident Indians (NRIs) via debt or deposits, senior government sources said on Monday. The government said all options to support the rupee are on the table, although the sources said tapping NRIs was considered a better option at this time than issuing a sovereign bond. "The government may not get terms as favourable as they might like but the cost of borrowing would be lower than onshore, and that's an incentive," said Philip McNicholas, BNP Paribas economist in Hong Kong.
"An NRI bond issue could be a quick and easy way to raise dollars as it may face less political push-back and you are tugging at the heartstrings of the diaspora," he said.
Bankers and analysts estimate the government will have to pay between 5 percent and 6 percent on domestic dollar deposits for a 5-year period if it wants to lure overseas Indian money.
"The sweetest of the sweet spot will be five years and 5 percent," said a private banker with a Swiss Bank in Hong Kong, whose clients include NRIs. At 5 percent, that would be at least 370 basis points over benchmark U.S. treasuries, higher than the returns on bonds and deposits in 1998 and 2000 - the last time India tapped its diaspora to support a weakening currency - of about 250 basis points over U.S. treasuries.
"The economy had better prospects in the 1990s," said a non-resident Indian banker in Singapore. "The services sector was opening up too then." Now, weak foreign direct investment and a record current account deficit suggested investors would demand a premium to part with their money. "How will India fund its dollar bill?" he said.
Those risks and the uncertainty of a general election due by 2014 also suggested NRIs will be reluctant to commit funds beyond five years, the bankers and analysts said.
It may be tougher to entice the estimated 25 million NRIs globally to