Sovereign Bonds Are Difficult & Risky; That’s Why We Should Do ‘Em
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:
Why We Must Take Difficult Risks
Please read in between the lines of what I had written. It wasn’t an unqualified endorsement. I had underlined the difficulties – i e, acquiring complex hedging and treasury management skills in volatile forex markets. And I had called it risky during times of capital flight. And yet, because it was difficult and risky, I had called it entrepreneurial – pregnant with exciting possibilities and gains.
After all, wasn’t it difficult/risky to fly across Pakistan and launch Israeli bombs at Balakot? Wasn’t it difficult/risky when Chandrayaan-2 was launched just a week after it was aborted? Or when, on 6 September, Vikram will have to soft land on the Moon’s uncharted South Pole? Or when US President Donald Trump had to be called a “liar” in diplomatic language?
You get the point, right? Taking difficult risks is endemic to governing a strong-yet-weak, rich-yet-impoverished, united-yet-fractious country like India, which is also vulnerable to border hostilities.
But as recent history has shown in all these situations, difficult risks have translated into enormous gains: against terrorists, in space, with America. So, why shy away from difficult/risky economic policies that are consciously kept within safe boundaries? Why not strive for massive gains in the economy too? Why capitulate to fear in the economic domain, when we had the gumption to ‘surgically strike’ deep inside enemy territory?
Naysayers vs Adventurers
But all such pleas fell on deaf ears. As always, the naysayers began to volubly neutralise the adventurers. And this time, the naysayers’ tent is brimming with contradictory ideologies:
You have to rub your eyes to believe that über liberals, committed centrists, and ultra-right-wingers have aligned their otherwise colliding convictions, to trash sovereign bonds. If you carefully read all their objections, they are saying that managing sovereign bonds is difficult and risky.
But their prescription, of killing this bold idea, is based on the flawed presumption that sovereign bonds are bad and harmful. Pray, why has “difficult” been conflated with “bad”, and “risky” with “harmful”? I fully disagree with such an equivalence. It is apparent that they are not quite getting it!
So, Let’s Examine Each Objection One-By-One…
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!
So, my dear Indians, yes, sovereign bonds are difficult and risky, but also hugely accretive; and that’s precisely why we must have the nerve to go ahead and launch ‘em on a leash.
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