The Reserve Bank of India said the redemption of the Resurgent India Bonds on October 1 will not impact the foreign exchange market or the rupee liquidity in the banking system.

A RBI release said the central bank has put in place the right mechanism to ensure the smooth redemption of RIBs in close consultation with the State Bank of India which floated the instrument in 1998.

The RBI said the foreign currency required by SBI for redemption will be sold by the central bank at the prevailing market rates on the date of maturity. The total amount of bonds to be redeemed, inclusive of interest, will be around $5.5 billion.

The RBI has already built up a $4.2 billion chest of forward foreign currency assets. It will sell foreign currency to SBI out of the forward foreign currency assets that will fall due around the date of redemption, the RBI release said.

"Any balance requirements, which are likely to be relatively small, will be met out of the foreign exchange reserve holdings of the Reserve Bank by way of outright sales to SBI," it added.

Thus, the impact of the RIB redemption on India's current foreign exchange reserves will be relatively small.

The State Bank has also taken steps to build up adequate rupee resources to fund foreign currency purchases from the Reserve Bank.

In case of any additional rupee requirement, the RBI will extend the reverse-repo facilities to SBI and offer liquidity support.

These reverse repurchase transactions will be undertaken as a part of the normal liquidity adjustment facility (LAF) and will cost the bank two percentage point higher interest than regular repo which is pegged at 5 per cent now.

The RBI said the present balance in the MoV (maintenance of value) account is more than adequate to cover the exchange loss on account of the rupee's depreciation till date.

An MoV is maintained in the Reserve Bank to fund periodic contributions received from the State Bank of India and the Government of India to cover any changes in the exchange rate of the rupee vis-à-vis dollar and other foreign currencies.

Due to the appreciation of the rupee against the dollar in the recent past, it is likely that there will be a surplus in this account at the time of redemption.

This surplus will be returned to SBI/Government of India (GoI) in the same proportion as their contributions to the MoV account, the release said.