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.
A global bond sale won’t reduce the amount of domestic government bonds the local market has to absorb and the country should worry about short-term “faddish investors buying when India is hot, and dumping us when it is not,” Rajan said in a column in The Times of India on Saturday.
Rajan adds to the growing chorus of opposition to the plan Finance Minister Nirmala Sitharaman announced earlier this month. The plan to sell bonds overseas comes as Prime Minister Narendra Modi faces shrinking options to raise funds as a slowing economy crimps tax revenues. Investors have also been concerned about his plans to borrow a record 7.1 trillion rupees ($103 billion) this fiscal year.
“Could the resulting volatility in India’s debt traded on foreign exchanges then transmit to our domestic G-Sec market? Would the foreign tail wag the domestic dog?” Rajan said. India should instead relax the requirement for foreigners to register as foreign portfolio investors and increase the current ceilings on investment in government rupee bonds, he said.
Three former central bank officials have also opposed the plan, saying the timing isn’t ideal as India runs quite a large budget deficit. India set the budget deficit target for the fiscal year at 3.3% of gross domestic product, lower than the 3.4% estimated in February’s interim plan.
“A small issuance will likely not be problematic,” Rajan, who is also a professor at the University of Chicago, said. “The concern is that once the door is opened, the government will be tempted to issue more, much more, with attendant risks –- after all, all addictions start small.”