Overseas bonds a better tool to salvage rupee, says Barclays

MUMBAI: Calling for more reform measures to stem the rupee free fall, Barclays Capital today said an offshore bond issuance could be the most potent near-term option to support the Indian currency.

So far this fiscal, the rupee has lost over 9 per cent against the US dollar and RBI has spent nearly USD 10 billion to contain forex market volatility during the period but without attaining the desired results.

The rupee fell to a record 61.21 against the dollar last week. It recovered marginally from that level but closed 33 paise down at 59.67 today.

"We believe a forex-denominated bond or deposit scheme could garner USD 15-20 billion relatively quickly, which could effectively address the concerns over funding the huge current account gap," Barclays said in research note here.

The CAD rose to a historic high of 4.8 per cent of GDP last fiscal from 4.2 per cent in FY12, which is one of the main reasons for the battering of the rupee, coupled with FII pullout on concerns over US turning the tap on easy money.

Barclays said a forex bond issuance could also trigger a part reversal of the recent outflows of over USD 8 billion since mid-May from overseas investors from the debt market.

"Given that such measures had been adopted earlier (in 1991 by the Narasimha Rao Government and in 1998 and 2000 by the NDA ministry), political backlash will likely remain limited if such a scheme is implemented," the note said.

The RBI on Monday announced a slew of measures which included raising short-term rates, cap on borrowing from LAF and sale of Government bonds under open market operations to stem rupee fall. But since Wednesday, the impact has dissipated from the market and the rupee continued to lose ground to the dollar after a near 1 per cent gain on Tuesday.

The government chipped in the next day with a slew of reforms on the FDI front.

"It would, thus, be appropriate for the RBI and/or the Government to follow up with more tangible measures to curb the rupee weakness," the note said.

Barclays added that RBI intervention in the forex market may yield some knee-jerk benefits but with shrinking forex reserves, the central bank's ability to intervene on a more prolonged basis has been reduced considerably.