The solution to India's liquidity crunch is far from home

Those who are awash in cash lack capital. Those who have adequate capital are thirsty for liquidity. That, in a nutshell, is the story of India’s financial crunch, and the surest way to ease it will require tapping Indians living overseas. In the past, New Delhi has resorted to such special hard-currency deposit programs to tide over balance-of-payment difficulties. A notable instance was in 1998, after India invited US sanctions by testing a nuclear weapon. Hooking nonresidents would be expensive now because dollar interest rates have risen significantly since the taper tantrum of 2013, the last time India nudged its banks to target the diaspora. The only way to justify such fund-raising would be if the program did more than just rescue the rupee: Easing a tight liquidity situation could be a worthwhile motivation. As much as $39 billion of publicly traded Indian shadow financiers’ rupee obligations, a fifth of the total, will mature between now and September, according to data. Rolling these over with new commercial paper, bonds and loans would be expensive; and in some cases, impossible: The nonbank lenders’ perceived credit quality has swooned over the past few months, ever since since one of them – the highly rated Infrastructure Leasing & Financial Services Ltd. group – began defaulting on debts. If the liquidity taps don’t open soon for shadow lenders, property markets could be shaky.