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3) What are NRI bonds? Examine how they can help in arresting the slide of rupee against dollar?(250 words)

Topic– Indian economy : Issues

3) What are NRI bonds? Examine how they can help in arresting the slide of rupee against dollar?(250 words)

The hindu

Why this question

The slide of rupee against dollar is leading to several economic issues, and intellectuals on one hand have talked how this is rupee correcting itself, and on the other hand have talked about how this slide needs to be attested soon. The article explains how NRI bonds can be used by RBI to stabilise rupee.

Key demand of the question

The question expects us to bring out what NRI bonds are, the theory behind how bonds of such nature can help in stabilizing the value of rupee and in practicality how it would pan out. We should also suggest some alternatives or complimentary steps that can be taken to arrest the slide in value of rupee.

Directive word

Examine – When you are asked to examine, you have to probe deeper into the topic,  get into details, and find out the causes or implications if any .

Structure of the answer

Introduction – Start with explaining the current situation about rupee and how RBI is looking at ways to deal with this situation.

Body

  • Explain that one of the step RBI is considering is issuing NRI bonds.
  • Explain what NRI bonds are – These are bonds issued by the Reserve Bank of India to non-resident Indians who are interested in investing their money in India. Since these bonds offer higher returns than other similar investments, they can be used as a tool to attract capital during times when other domestic assets fail to attract the interest of foreign investors. Many investors view them as a safe investment as these bonds are issued by the Indian central bank.
  • Discuss in theory how it would impact the demand of dollar vs rupee, direct investment in India and help in stabilizing the value of rupee
  • Highlight why the step is a smart move in this time – the limited or in some cases the adverse impact of some other steps like raising duties, interest rates etc. Explain the benefits of this move and past example when such bonds were used – NRI bonds can help raise $30-35 bn,  and are preferable over a RBI rate hike. NRI bond issuances—in 1998, 2000, 2013—have always stabilised the rupee.

Conclusion – Give your view on the effectiveness of NRI bonds and some other alternatives which can form the way forward.