The good, bad and ugly of Nirmala Sitharaman’s dollar dreams

Notwithstanding hedging, a sharp rupee decline could make us despise, more than anything, our own vulnerability.

Published: 18th July 2019 08:04 AM  |   Last Updated: 18th July 2019 08:04 AM   |  A+A-

Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman (File Photo | PTI)

Express News Service

HYDERABAD : Amid falling tax revenue and rising need for capital, Union Finance Minister Nirmala Sitharaman has decided to 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 overdependence 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 leave the US and others in the dust. But experts warn of dire consequences witnessed by emerging economies, which couldn’t resist the dip-into-foreign-savings temptation, but eventually succumb either due to currency or economic shocks. Just look at Mexico, Indonesia, Brazil, Russia and Greece — and the argument is over. 

In fact, India too had considered the idea earlier, 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 capitalise on cheap capital due to historically low interest rates in the West and even negative rates in parts of Europe. However, ‘professional pessimists’ argue that often exchange rate is unpredictable, fluctuating even at the slightest provocation. 

Notwithstanding hedging, a sharp rupee decline could make us despise, more than anything, our own vulnerability. For context, 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 was Asia’s worst performing currency, the central bank refused to intervene, insisting that the market should determine its direction. 

Also, coupon rate on bonds is based on the country’s credit profile, which now 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 a 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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