NEW DELHI: The government seems to be having second thoughts about coming out with sovereign bonds worth USD10 billion over concerns that the cost could shoot up if the rupee depreciates against the dollar. Finance Minister Nirmala Sitharaman had announced in the Budget that the government would go in for sovereign bonds or debt issued abroad. These bonds are denominated in dollars and the value of debt along with interest has to be paid back in dollars.
The rationale for raising money abroad is that interest rates are lower in global money markets such as London and New York than in India. Finance ministry top brass felt it would be possible to borrow at rates as low as 3.25-3.5 per cent and they were planning to issue a tranche of sovereign bonds payable after 10 years as early as October this year.
However, members of the PM’s Economic Advisory Council have pointed out that if the dollar appreciates against the rupee — a strong possibility given the way the world economy is turning turbulent and India’s exports are shrinking — the actual cost of these bonds could turn out to be much higher. The rupee, which traded at 54 to a dollar in March 2013, depreciated to 60 by August 2014. and by July 2019, it fell to `69.
Fall in Rupee will increase costs sharply
It means that to pay back USD1 borrowed in 2013, one would have to pay 28 per cent extra six years later because the rupee value has fallen. In comparison, domestic 10-year maturity bonds issued by the government pay out interest of 6.56-7.15 per cent.
Rathin Roy, director of National Institute of Public finance and Policy and a member of PMEAC, was one of those who publicly opposed the bonds by pointing out that all nations that went in for sovereign bonds since World War II including Turkey, Brazil, Greece, Indonesia and Argentina, have paid dearly for it. Roy, as well as several former RBI governors, also pointed out that once India went down the path of borrowing from abroad, it may also have to listen to the diktats of lenders.
“I have grave concerns about this proposal on the grounds of economic sovereignty, and about the macroeconomic consequences,” Roy had said at a function earlier this week. The unspoken fear among many was that the western powers whose institutions would pick up any debt paper floated by India may use their control over it to influence Indian economic policy at a later stage.
Officials said the issue of the sovereign bond was being weighed after the opposition to it surfaced and may even be reworked into a smaller offering as rupee-denominated bonds or ‘Masala bonds’, where the currency risk is not taken on by the government but by the lender. “When the currency risk is with the lender, the terms are more comfortable for us. But obviously, such bonds carry higher rates of interest,” pointed out former State Bank of India MD Sanjay Bhattacharyya.
Pros and cons
If the rupee weakens, the government will have to pay back more money to buyers of sovereign bonds to make up for the appreciation in dollar value.
On the plus side, raising debt abroad is cheap because the interest rates are low.
In case of rupee bonds, the lender (the buyer of bonds) will bear the risk of currency fluctuation.