The trouble is that the exchange risk is unpredictable. If convertible currencies strengthen, the rupee weakens. The deficit in India'smerchandise trade account is endemic; this shortfall is moderated by net inflows in the invisibles account. If for any reason, net invisibles slow down, the current account deficit will burgeon. Despite large reserves, the rupee may consequently weaken. There is no telling by how much the repayment liability of RIB funds can bloat in depreciated rupees by September 2003. So, covering depreciation in excess of 1 per cent a year could make a big dent in the government's budget. The government has sought to get round this problem by offering undated, (that is, non-redeemable) non-negotiable, non-interest bearing special securities as recompense. There will be no cash borrowings against these securities from the RBI, but the government's debt to it will increase. What the RBI will get is the government's useless and unsalable IOUs in settlement of loss from depreciation.

Thus is the `RIB-maintenance of value account' fund being created: the government takes the risk, but passes on the buck to the Reserve Bank,which will have new government debt in its assets. But these are non-earning, non-redeemable assets. There will be no new money created as a consequence. So, how will the Reserve Bank service RIBs? Out of profits from central banking operations of course. To that extent, annual profits entering the central budget (Rs 5,600 crore or so a year) should decline. In effect, new annual debt will measure the RBI's claim on the government. This claim will have to be adjusted against the profits due to it from the Reserve Bank. This will deepen the hole in the budget. It will not be a free lunch as made out by the government.