Venturing out of our own backyard

Venturing out of our own backyard

Overseas borrowing needs honest accounting.

Government’s announcement in the Budget to raise some of its borrowings abroad has brought cheer to the bond markets, as it should. This marks a significant departure from the way India looks at its borrowing needs. But the government must tread carefully, assessing the costs of borrowing in foreign currency vis-à-vis its advantages. True, with excess liquidity in foreign markets creating negative bond rates in countries such as Germany, India could borrow cheaper to finance domestic investments. This will free up domestic savings, which can be deployed into viable private investments and help check interest rates in India. Today, foreign institutions are allowed to buy Indian government bonds in rupees, and the exchange risk is borne by them. Similarly, when India borrows in foreign currency, the exchange risk will have to be borne by the government. The cost of hedging the foreign exchange risk on such borrowings to interest payments must be factored in. This calls for honest accounting. Government must specify the exact proportion of its borrowings that would come through this route.

In 2003, Barry Eichengreen, Ricardo Hausmann and Ugo Panizza coined the term ‘original sin’ for countries unable to borrow abroad in their own currency. The global financial global crisis showed the perils of foreign currency borrowing without having adequate foreign currency revenue streams to service the debt.

India, with forex reserves of around $427 billion, now wants to leverage on its relatively lower external debt exposure — less than 5% of GDP — to sell sovereign bonds overseas. At the end of March 2019, the total sovereign debt stood at $103.8 billion. Macroeconomic conditions are relatively more stable now. The 2018-19 fiscal deficit is at 3.4% of GDP, but the current account deficit (CAD) at 2.1% is perilously close to danger levels. The issuances can establish a benchmark that helps price discovery for other corporates tapping overseas credit markets. The issuances must be done in a planned way, ensuring there are no macroeconomic risks.