The good, bad and ugly of Finance Minister Nirmala Sitharaman's dollar dreams 

Sitharaman has decided to be bold and shop overseas for an urgent whip-round of $10 billion via sovereign dollar bonds. 

Published: 17th July 2019 11:10 AM  |   Last Updated: 17th July 2019 11:10 AM   |  A+A-

Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman (File Photo | PTI)

Express News Service

HYDERABAD: "We are maxed out," sighed investors. The centre, states and PSUs have been borrowing recklessly and owe Rs 90 lakh crore to individuals, mutual funds, insurers, provident and pension funds, banks and foreign investors.

This fiscal, they plan to raise another Rs 7 lakh crore, but the borrowing binge is snuffing private entities, whose cries are getting shriller: "You (government) are crowding out." 

High domestic savings leave enough dough for companies and the government to borrow, but households have an amber light: "We've no appetite to save more." Lower savings increases the cost of capital and reduces investments affecting growth and job creation. 

Clearly, the Indian government has boxed itself into a corner, so Finance Minister Nirmala Sitharaman has decided to be bold and shop overseas for an urgent whip-round of $10 billion via sovereign dollar bonds. 

The proposed government securities will be pretty much like the usual 10-year, risk-free bonds, bearing an assured interest rate. Only, payment will be made in foreign currency like dollars and euros. Until now, all external debt (comprising a piffling 2.8 per cent of total debt) is rupee-denominated, raised at concessional rates from multilateral agencies like the World Bank. This over-dependence on domestic borrowings so far has insulated us from global currency volatility and that's why critics reckon the country's first-ever foreign currency bond as nothing but 'mission-creep,' Sitharaman-style.

Currently, Indian bonds are the darling of investors for its high-interest rates, which leaves the US and others in the dust. But experts warn of dire consequences witnessed by emerging economies who couldn't resist the dip-into-foreign-savings temptation but eventually succumbed either due to currency or economic shocks. Just look at Mexico, Indonesia, Brazil, Russia and Greece. The argument's over. 

In fact, India too considered the idea, but shot it down not once but thrice in 1991, 2008 and 2013, perhaps sticking to the script: Thou shalt not gamble with taxpayers' money.

But now the government believes it needs to capitalize on cheap capital due to historically low-interest rates in the West and even negative rates in parts of Europe. Moreover, according to the Bank of International Settlements, sovereign dollar bonds are less riskier when forex reserves are high, foreign borrowing is lower, banks hold more government debt, and global volatility is less. India ticks most of the boxes and given the strengthening macros, it probably has enough confidence to commit the 'original sin.' 

However, professional pessimists argue that often exchange rate is like an unpredictable girlfriend, losing cool even at the slightest provocation and could expose the economy to unforeseen miseries. Notwithstanding hedging, a sharp rupee decline could make us despise, more than anything, our own vulnerability.

For context, the rupee depreciated an alarming 48 per cent against the dollar in the past 10 years -- the typical tenor of bonds. Just last October, when rupee behaved like a maniac becoming Asia's worst-performing currency, the central bank looked the other way insisting that it will never lord over the rupee market and instead will let the market determine its direction. 

Also, the coupon rate on bonds is based on the country's credit profile, which currently is in a disarray. While Moody's rating is at a respectable Baa2, S&P and Fitch consigned the lowest investment grade of BBB Minus. 

Complicating matters, fiscal deficit of states and centre, inflation and currency volatility often teeter on the edge ready to declare war on the sovereign, though unintentionally.  

That said, provided rupee remains in its realm and ratings stays stronger, foreign bond issuances can set a reliable interest rate benchmark for overseas credit, reduce yields in the Indian bond market, and lower cost of capital. Considering the negatives and positives, the message from optimists, for now, is clear. Do it once and do it right.

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