OVERSEAS BONDS AND ITS ISSUE
What’s in news?
India’s plan to issue foreign currency debt has no real benefit and is fraught with risks, according to former Reserve Bank of India governor Raghuram Rajan.
- The government, Finance Minister Nirmala Sitharaman announced in the Budget speech, plans to raise a portion of its gross borrowing from overseas markets.
- The government and the Reserve Bank of India (RBI) will reportedly finalise the plans for the overseas issue of sovereign bonds by September, 2019.
- While several commentators have argued that this is a risky move, the government itself is convinced that it will help boost private investment in the country.
Overseas bond issue:
- 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.
Benefits of an overseas bond issue:
- The government has been arguing that the quantum of its borrowing within India is ‘crowding out’ the private sector.
- In other words, it is saying that government borrowing is at such a level that there are not enough funds available for the private sector to adequately meet its credit and investment needs.
- If the private sector cannot borrow adequately, then it cannot invest as it wants to, and that cripples one major engine of economic growth.
- According to Finance Secretary Subhash Chandra Garg, government borrowing accounts for about 80-85% of domestic savings. He also said that the overseas borrowing programme allows the government to maintain its gradual reduction of the fiscal deficit. Had the government listened to some commentators and relaxed its fiscal deficit to say 4.4%, then this would have allowed it to borrow an additional ₹2 lakh crore from the domestic market. However, this would have been ₹2 lakh crore that would not be available now to the private sector for borrowing purposes.
- Therefore, borrowing overseas allows the government to raise funds in such a way that there is enough domestic credit available for the private sector.
- It is important to note that the appetite of the international market for Indian bonds and their price will also say a lot about how India is viewed globally on the risk factor.
- For example, if the rate at which India can borrow overseas is low, then this would mean the global market assigns a low risk to India defaulting. This would undoubtedly be something the Narendra Modi government would take pride in.
Risks associated with this bond:
- Several economists have expressed their concerns over the fact that India might follow the path of some Central and South American countries such as Mexico and Brazil.
- In the 1970s, several of these countries borrowed heavily overseas when the global market was flush with liquidity. But then, when their currencies depreciated sharply a decade later, these countries were in big trouble as they could not repay their debt.
- India is not likely to be viewed as a risky proposition by the international market and so is likely to fetch an attractive rate for the bonds. Cheap and plentiful funds, however, should not encourage the government to borrow too heavily from abroad.
- Another risk to India from overseas borrowings is that this would lead to a quicker increase to its foreign exchange reserves, which would lead to a stronger rupee at a time when it is already appreciating against the dollar.
- This, many experts say, would be an adverse outcome. A stronger rupee would encourage imports at a time when the government is trying to curb them, and discourage exports at a time when they are being encouraged.
- On the other hand, a rupee depreciation for whatever external reason would prove even more disastrous as it would make it far more expensive for India to repay its external debt.
- The third problem with an overseas bond issue is that the government would not be able to inflate itself out of trouble.
- That is, in the domestic market, if the government does ever reach the stage where it is finding it difficult to repay its debt, it can simply print more money, let inflation rise quickly and repay its debt. This is not an option in an overseas bond issue. The Indian government cannot print foreign currency to repay its debt.