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India Millennium Deposit not to be sold in the US

NetScribes/Amitava Sanyal and Janaki Krishnan

State Bank of India chairman and managing director G G Vaidya said the India Millennium Deposit (IMD) programme, which follows the earlier Resurgent India Bonds (RIBs) in form and scope, would not be implemented in the US. The RIB had raked in $590 million, or 14 per cent of its entire collection of $4.2 billion, from the US market in 1998.

"The bank has been advised by the US Council that regulatory matters for implementing the IMD in the US would require a considerably longer timeframe against that proposed for implementing the current programme. Accordingly, the IMD programme will not be implemented in the US," Vaidya told mediapersons in Bombay on Monday.

Underlining that the purpose of the programme was not aimed at bailing out the government's 2000-2001 borrowing programme, Vaidya said that 60 per cent of the amount raised will be invested in infrastructure projects or bonds. He expected an average return of 15 per cent from the projects and that of 12 per cent from the bonds. The remainder would be kept aside for meeting statutory liquidity ratio (SLR) requirements or parked in treasury instruments. Initially, however, all the funds would be parked in such instruments till they were invested in infrastructure projects.

The IMD funds would be converted into rupees as per the forex and infrastructural requirements of the country, Vaidya said. Till such time, they can remain "invested in government securities."

Vaidya also said that 50 per cent of the amount mobilised by other participating banks would be on-lent to them at 10 per cent for a period of five years. In that sense, the IMDs would follow the same on-lending terms as that of the RIBs.

SBI will incur a total cost of 10 per cent in dollar terms on the IMD funds. Apart from the coupon rate of 8.5 per cent, this will include half a percentage points in issue expenses and 1 percentage point as exchange risk. In pound sterling, the cost will be at 7.85 per cent, while it will be 6.85 per cent in Euros, payable half-yearly. The IMD will not attract cash reserve ratio (CRR) requirements.

Though Vaidya is confident of returns in excess of these costs, managing the IMDs is expected to be a challenge as they are priced well above the normal FCNR(B) deposits. Moreover, since the foreign exchange risk is being borne by SBI and the government, the IMD effectively becomes a variant of the now-defunct FCNR(A) deposit which affected the government's balance sheet. In fact some of the funds could just come through the conversion of existing FCNR(B) deposits into IMDs.

In that sense, the gamble seems to be simple: raise dollar funds to improve sentiments. The success of the IMD, which is almost a certainty given its attractive coupon rate and exchange cover, would bolster foreign exchange reserves of the country. This would help the Reserve Bank of India tackle the bearishness in the rupee market and prop up the currency through dollar inflows..

Also, with foreign direct investment and foreign institutional investor (FII) funds not coming in as projected, the IMD can provide the government with the much needed cushion to meet the country's crude import bill.

The IMD programme, which is slated to kick off on October 21, will remain open for a maximum of 30 days and a minimum of 10 working days from the date of opening.

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