The State Bank of India is coming out with a special deposit scheme  to enable  investors in the Resurgent India Bonds to reinvest the redemption amount.

The $4.2 billion RIB bonds are due for redemption in August.

According to banking sources, the State Bank's new liability product will be on the lines of the foreign currency non-resident (bank) -- FCNR(B) -- deposits and will carry a maximum tenor of three years.

The rate of interest to be offered on this product will be marginally higher than the rates prevailing for FCNR(B) deposits. The product details were yet to be finalised, said banking sources.

Since this will be a special deposit, the State Bank will need the Reserve Bank of India's approval before floating it.

The triple-currency RIBs, floated in August 1998, carried a relatively high interest rate to mop up foreign currency in the wake of the US sanctions on India.

For a period of  five years, the dollar-denominated funds carried a 7.75 per cent coupon rate, 8 per cent for funds in pound sterling and 6.25 per cent for funds in Deustche Mark.

There is also a proposal to extend the maturity of the new product beyond three years so that the funds can remain invested longer.

However this appears unlikely  as there is an inherent exchange rate risk involved and on a longer term the outlook on interest rates is difficult to ascertain.

Money market dealers said the State Bank had been heavily investing in 91-day treasury bills maturing after August, and liquid government bonds  as well as the RBI's 14-day liquidity adjustment facility to stay liquid.

This is to build a rupee chest that can be used to buy dollars to meet the redemption of the bonds in August.

Alhough  there is no shortage of liquidity,  the arrangements are being made to avoid undue volatility in the market as the redemptions will amount to close to Rs 20,000 crore (Rs 200 billion) if every investor in wants to redeem.

Many currency strategists feel that  the spot rupee might touch the Rs 46 per dollar level by August when the bonds are due for redemption.

The redemptions will not have much effect on the reserves position as the bulk might be converted into rupee-denominated deposits.

This is because currently rupee funds command higher interest rates than dollar funds. The interest rate differential has further widened following the recent 25 basis point cut in US interest rates.

New plan

• The $4.2 billion RIB bonds are due for redemption in August.
• SBI's new liability product will be on the lines of the foreign currency non-resident (bank) deposits.
• The rate of interest to be offered on this product will be marginally higher than the rates prevailing for FCNR(B) deposits.