Objection: Volatile dollar/rupee rates will create “unquantifiable” costs in the long term.

Counter: Wrong! By always hedging against future dollar rates, and paying a premium of 4-odd percent to do that, our costs will forever be controlled and quantifiable. While it’s true that hedging costs may often push the total interest rate a few basis points higher than what the government could borrow at in local markets, we should remember that these higher costs get compensated by the several positives that accrue on venturing overseas – including the fact that private borrowers get more cash in domestic bond markets.

Objection: Why go overseas when you can ask FPIs (foreign portfolio investors) to lend more in the domestic market, ie, sell them more rupee bonds.

Counter: This one is utterly specious, if not an outright falsehood. Because, when you float a sovereign bond overseas, you access an entirely new category of lenders, over and above FPIs that are authorised to invest in India. There are millions of individual/institutional investors, perhaps holding trillions of investable dollars, who would not even think of venturing into alien/unfamiliar/illiquid markets (aka India’s bond markets) in an unknown currency (aka INR). But these very investors may happily experiment on NYSE in dollar-denominated India Sovereign Bonds. So, you are accessing an entirely new and untapped universe. To equate them with a handful of FPIs is to believe that chalk is as delicious as cheese.

Objection: India could stare at an international default in frightful, flight-ful times.

Counter: C’mon. Really, c’mon! This fear is not even worth the amygdala it’s engineered on. India gets an annuity of nearly USD70 bn from its hard-working sons and daughters living overseas who willingly repatriate to their loved ones left behind. NRIs have also kept an unflinching USD100 bn in term deposits in their motherland. Finally, India’s forex reserves are nearly 43 times USD10 bn (and growing). If we can’t have the stomach for this much risk, let’s just quit (or take voluntary retirement).

Objection: The only advantage of sovereign bonds is lower interest rates; why not just ask RBI to reduce the repo?

Counter: This is rubbish. If a regulatory fiat could completely control/tame market variables, then why even bother with economic policies? The government should just say “Siri, create jobs, increase manufacturing to 25 percent of GDP, double farmers’ income by 2022, and reopen closed car showrooms”, and ping, it’s all done!

ADVERTISEMENTREMOVE AD

Members Only

Sovereign Bonds Are Difficult & Risky; That’s Why We Should Do ‘Em

Yes, sovereign bonds are difficult & risky, but also hugely accretive; and that’s why we must go ahead & launch ‘em.

Raghav Bahl

Published: 27 Jul 2019, 4:57 PM IST

Opinion

Small

Medium

Large

If Alan Greenspan’s America suffered from irrational exuberance, economic nationalists’ India is seized by irrational fears. It became oh-so-painfully evident when the mint fresh idea of issuing USD 10 bn of overseas bonds – a cautious tenth of the government’s gross borrowing programme – and less than three percent of foreign exchange reserves – got converted into a national trauma in less than three weeks.

I had greeted Finance Minister Nirmala Sitharaman’s announcement with these words of joy on 6 July 2019, a day after her maiden budget:

BECOME A MEMBER

Sovereign Bonds Are Difficult & Risky; That’s Why We Should Do ‘Em

Yes, sovereign bonds are difficult & risky, but also hugely accretive; and that’s why we must go ahead & launch ‘em.

Read Latest News and Breaking News at The Quint, browse for more from opinion

Topics: Indian Economy Raghav Bahl Sovereign Bonds