The need for an overseas fund-raising effort is urgent. The Reserve Bank of India's (RBI's) foreign exchange assets have dwindled by $27 billion, or almost nine per cent, over a year. For sentiment in the Indian currency to improve, this slide needs to reverse quickly.
India had $28 billion in reserves in 1998 when Resurgent India Bonds were issued to non-resident Indians (NRIs); it has $286 billion in the kitty now. But the economy is also far more open to trade than it used to be. In 1998, India's reserves were sufficient to pay for seven months of imports.
That number hasn't changed, according to Barclays economist Siddhartha Sanyal. Meanwhile, inflation and the fiscal deficit are much higher now than they were in 2000, when India Millennium Deposits were floated, while the rupee is a lot weaker.
The euro zone's woes are adding to the urgency of the situation.
In 1998, after the US imposed sanctions against India in retaliation for the Pokhran nuclear tests, the government looked to NRIs to fill an external financing gap. Back then, global investor sentiment was skittish because of the Asian financial crisis, Russia's debt default and hedge fund Long-Term Capital Management's meltdown.
Those events will look like a walk in the park compared with the pandemonium that will erupt in financial markets should Greece exit the euro zone or Spain or Italy get shut out of bond markets.
If global credit freezes up in response to a deepening of the euro crisis, Indian banks won't be able to procure dollars at any price. It will be a repeat of the hard-currency scramble that followed the collapse of Lehman Brothers, but at a much bigger scale.
The time for India to build a hard-currency buffer is now. In case the delay is for a more trivial reason, such as an inability to come up with an appropriate name for these debt securities, I have a suggestion. How about we call them "India Reawakening bonds"?
That should sound pleasingly pompous to the ruling class. But it is, at the same time, a mea culpa, an admission by the government that it has been snoozing at the switch. After all, why would India need to reawake if it never went to sleep in the first place?
Whatever the reason for the hand-wringing in India's policy-making circles, banks in Singapore are not standing idle. They are manufacturing their own India Reawakening deposits, which private bankers are selling to a yield-hungry diaspora.
Wealthy NRIs who are getting pitched these synthetic securities are rubbing their eyes in disbelief. India's desperation is now a tempting investment proposition.
One of these proposals works like this: the client puts one million Singapore dollars in a British pound-denominated foreign currency non-resident (FCNR) deposit with the Indian branch of a foreign bank. The deposit will earn a little more than three per cent over the next one year.
The Singapore branch of the bank, in turn, lends the client 900,000 Singapore dollars at less than two per cent also for one year. Upon maturity of the FCNR deposit, the pounds will be brought back into Singapore and reconverted into Singapore dollars at a rate that is locked in today.
After repaying the loan to the bank, the client will be left with a guaranteed 10 per cent return on his original 100,000 Singapore dollar investment. Leaving the same funds in a local-currency fixed deposit in Singapore will earn the saver just 0.075 per cent a year.
Like this, the Singapore branch earns a decent yield in an environment where banks are dying to make a spread; and the client takes home a large reward for being a well-heeled non-resident.
The Indian branch of the bank doesn't do too badly either; it manages to raise a deposit at a somewhat cheaper price compared with the retail rate, which is currently as high as 3.8 per cent for British pound-denominated FCNR deposits.
Everybody is happy, thanks to 9-to-1 leverage.
For bankers in Singapore, products like these are no big deal. But they may provide a useful template to India's policy makers, who could consider exploiting the glut of money in the global banking system by exhorting local banks to work with lenders overseas.
The foreign banks can encourage their NRI clientele to put their wealth to work in leveraged hard-currency deposits under the existing FCNR scheme, but preferably over longer tenures of three to five years.
If this "wholesale" funding route is taken, the cost to the Indian banking system of raising, say, at least a third of the $15 billion that economists believe an NRI deposit or bond programme ought to be able to garner will be reasonable. A wholesale fund-raising effort will not require expensive marketing campaigns and will also be quicker to implement. In fact, if it proves to be a success, a retail product may not even be needed.
Of course, using the existing FCNR-B window will mean allowing individual banks, with their varying risk-management expertise, to bear the currency risk, rather than asking the RBI to underwrite it.
It would have been nice if the economy had not been so badly reliant on global liquidity.
If the government's fiscal profligacy hadn't gone so badly out of control, domestic savings net of public sector dis-savings wouldn't have collapsed the way they have.
Since investments have been slower to fall, there is a large funding gap in the form of a current account deficit.
Such is the extent today of the economy's addiction to "O-P-M" other people's money that if it is suddenly denied access to borrowed dollars and forced to go cold turkey, it would have a seizure.
A trip to the fiscal rehab clinic will definitely be needed, but after the economy is out of intensive care. The priority right now must be to seek a quick infusion of a few billion dollars into the banking system to turn the tide of negative investor sentiment.
The time to act is now - before Standard & Poor's follows through on its warning and downgrades India's sovereign rating.
The writer is a Singapore-based financial journalist. These opinions are his own.