Borrowing in foreign currency from foreign markets is always tempting for Indians, including the Indian government. The steep interest rate differentials between India on the one hand, and the US and Europe on the other, hold gravitas. But the flip side is the distinct possibility of having to pay back in terms of Indian rupees much more than what you obtained while borrowing.
If a company borrows USD 10,000 when the US dollar is quoted at Rs 50, it will get Rs 5 lakh.
However, should the rupee depreciate steeply against the dollar, and five year down the line when the bullet repayment is due to the US dollar commanding Rs 70, the company’s goose would be cooked. It would have to repay Rs 7 lakh. The gains on account of savings in interest would have been more than neutralised by the exchange rate differential. Thus, in the volatile FOREX market, one can lose in the swings what one gained at the roundabout.
The Oil Market & Foreign Exchange
Reliance Industries Ltd is by far the most best placed organisation to raise loans in foreign currency. It has a natural hedge – it has to pay off the borrowings in US dollars, but it also is substantially exports-denominated and paid for in greenback. Thus, it doesn’t have to constantly look over its shoulders at the gyrations in the FOREX market.
Other organisations and governments (including the Indian government) are not in such an enviable position. Indian Oil Corporation, the country’s canalising agency for crude oil imports, not only buys oil but also US dollars to pay for them. For IOC, efficiency in FOREX mobilisation can reduce its oil price, and any efficiency in oil buying can result in lesser need for foreign exchange.
Unlike Reliance, IOC is not an exporter so much so that it feels the heat of the gyrations on the forex front more than others.
Enter the Indian government in a big way to meet its gargantuan financial requirements and everyone has to sit up and take notice. In the Budget 2019 announce by the Finance Minister Nirmala Sitharaman on 5 July 2019, the government road map was spelt out – a substantial part of the Centre’s gross market borrowings for the current fiscal are pegged at Rs 7.1 lakh crore, and will be met out of external borrowings.
India’s FOREX Market Has Been Hostage To Oil Market
There is a vital difference between a private and sovereign external borrowing. Any deleterious or beneficial effect of private borrowing enures to their account, but a sovereign borrowing can have a profound national impact. These can be highlighted as follows:
• It is axiomatic in the FOREX market that a company’s rating can be no better than its government’s ratings. Suppose India is just investment-grade and its government’s bonds are quoted at considerable discount to the issue price – even a blue chip Indian company cannot get a good response to its bonds in the international market
• While a company’s misadventures with foreign borrowings would singe it alone, any sovereign misadventure would singe the entire nation in the form of heightened fiscal deficit
• India’s foreign exchange market has been hostage to the oil market for a long time now. That is because India imports as much as 80 percent of its crude oil. Oil being a scarce commodity and made scarcer still thanks to the machinations of the OPEC – the oil cartel – India has always been at the receiving end of the shortages, subversions and manipulations of the oil market. Being a net importer, it has always had to defend the Indian rupee from plumbing to a new low each time the world faces an economic crisis
• The bulk of India’s FOREX reserves of the order of USD 427 billion is what is known as hot money – the money that can leave India as quickly as it came. We have mobilised more by way of external commercial borrowings (ECB) than by way of Global Depository Receipts (GDR). GDRs represent shares of the issuer Indian company. They are not repayable whereas ECB is repayable. We get more of portfolio investments than Foreign Direct Investment (FDI). The latter once again being equity is not repayable. We import a lot more than we export.
How Indian Govt Can Make FDI Attractive
With all odds and factors ensuring the exchange rate is stacked against us, India’s gargantuan sovereign borrowings could be a cause for concern, but things can improve if the Indian government handles the situation with care, and not with frivolous abandon.
Along with sovereign borrowings it can also make FDI attractive for the foreigners, besides adding sweeteners to GDRs.
‘Make in India’ too can cut down a lot of imports, chiefly arms and ammunitions and electronic items, besides increasing India’s exports. The import of gold can also be made as difficult as possible. Oil of course would remain intractable.
Thus, the big bang FOREX borrowings should be a part of the larger package.
(S. Murlidharan is a Chartered Account, and has also written extensively for The Hindu Business Line between 1996 through 2013, and later started contributing regularly to Firstpost on a range of issues like business, economic, tax. He is currently based in Chennai. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)