India's Overseas Debt Plan Has Limited Benefit And Many Risks: Raghuram Rajan

He said the argument that foreign borrowing would be cheaper because dollar interest rates are lower than rupee interest rates is “bogus”.

New Delhi: India’s decision to go in for a sovereign bond issue has limited benefits and comes with an array of risks, former Reserve Bank of India governor Raghuram Rajan has said.

While issuing a small amount of foreign currency debt may not be problematic, India should be worried about “short-term faddish investors, buying when New Delhi is ‘hot’ and “dumping us when it is not”.

In an op-ed article in the Economic Times, Rajan has also pointed out that the argument that foreign borrowing would be cheaper because dollar interest rates are lower than rupee interest rates is “bogus”.

The former RBI governor wrote:

“Foreign bankers often meet finance ministry officials, trying to persuade India to issue a foreign bond. In my experience, they usually started by saying that such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates. This argument is bogus – usually the lower dollar interest rate is offset in the longer run by higher principal repayments as the rupee depreciates against the dollar.”

“Moreover, times when the rupee depreciates significantly (such as during the Taper Tantrum) are times when India’s image amongst international investors is bad, and the higher repayment requirement on dollar debt could lead to even greater market turmoil. For this reason, most countries issue government debt in foreign currency only when they are unable to issue in their own currency.”

Rajan’s comments join an increasingly heated debate in India over the last two weeks after finance minister Nirmala Sitharaman announced in her budget speech that the Centre would sell bonds overseas to help finance the government’s fiscal deficit.

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At least two other former and senior RBI officials have also opposed the plan.

In his article, Rajan has warned that skittish investors and their resulting volatility in India’s debt could transmit to the “domestic G-sec market” and thus become a case of the “foreign tail wagging the domestic dog”.

He has noted:

“The bankers [who try to convince India to issue a sovereign bond] typically shifted arguments once again – this time to emphasise that foreign trading would enhance liquidity in government issuances. Perhaps, but if that trading were done in India (by encouraging those investors to buy and sell G-Secs in India), would not the liquidity of local trading increase yet more? Do we want stronger Indian markets or stronger foreign markets? Far better than issuing a foreign currency bond abroad (where we have absolutely no control over who invests) would be to relax our requirements for foreigners to register as foreign portfolio investors, or if we have absolutely no concern about who invests, eliminating these requirements entirely (in my view, a step whose time has still not come).”