FOREIGN BONDS ISSUING
What’s in news?
The government announced in the Budget its decision to raise a part of its gross borrowing in foreign markets i.e., issuing of foreign bond.
- Nirmala Sitharaman has become the first Indian finance minister to agree to borrow in foreign currency to finance the fiscal deficit.
- In her maiden Budget speech last week, after she announced this plan, economic affairs secretary Subhash Garg added that the plan is to raise up to 10-15% of government borrowing $10 billion from the first overseas sovereign bond. In all, central government plans to borrow a record Rs 7.1lakh crore this year.
- The shift in India’s position comes in wake of the main pool of savings from which the rest of the economy raises debt, the households’ financial savings, getting almost completely pre-empted by the growing borrowings by the government and public sector.
- Unsurprisingly then, North Block is desperate to ease the pressure of its growing borrowings on domestic debt markets, and has dismissed those cautioning about the risks of dollarisation of the sovereign debt as needless orthodoxy.
What is foreign bond?
- “Foreign currency convertible bonds (FCCBs)” are a special category of bonds. Corporates issue FCCBs to raise money in foreign currencies.
- These bonds retain all features of a convertible bond, making them very attractive to both the investors and the issuers.
- A foreign bond is a bond issued in a domestic market by a foreign entity in the domestic market’s currency as a means of raising capital.
- For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds, such as bulldog bonds, Matilda bonds, and samurai bonds, is a common practice.
- Since investors in foreign bonds are usually the residents of the domestic country, investors find the bonds attractive because they can add foreign content to their portfolios without the added exchange rate exposure.
- These bonds assume great importance for multinational corporations and in the current business scenario of globalization, where companies are constantly dealing in foreign currencies.
Problems with Foreign Bonds:
Investing in foreign bonds involves multiple risks, foreign bonds typically have higher yields than domestic bonds.
- Foreign bonds carry interest rate risk. When interest rates rise, the market price or resale value of a bond falls.
- Foreign bonds also face inflation risk. Buying a bond at a set interest rate means the real value of the bond is determined by the amount of inflation taken away from the yield.
- Currency risk is also an issue for foreign bonds. When income from a bond yielding 7% in a European currency is turned into dollars, the exchange rate may decrease the yield to 2%.
Examples of Foreign Bonds:
- A bulldog bond is issued in the United Kingdom.
- A Matilda bond is a bond issued in the Australian market by a non-Australian company.
- A samurai bond is a corporate bond issued in Japan by a non-Japanese company.