While negative sentiments coupled with FII outflows and demand from importers have weakened the rupee in recent months, India has many avenues to increase capital inflows to fund its current account deficit pegged at $70 billion for FY14. Apart from asking state-run lenders and PSUs to bring in $11 billion through quasi-sovereign bonds and external commercial borrowings, the finance ministry has said all options including that for sovereign bonds are on the table. Sovereign bonds entail a higher cost—hedging costs will add almost 7-8% to the interest cost.
The other option is to tap the multilateral agencies given that the government’s external debt is now at R4 trillion, less than a tenth of total public debt of R43.2 trillion. The problem is World Bank and ADB have a ceiling for their country-assistance programmes, which cannot be increased within a short span of time as it requires approval from their respective boards. Moreover, the loans also come with stiff conditionalities. The multilateral agencies can help by offering in partial guarantee to the quasi-sovereign or the sovereign bond issues, which will lower the cost of borrowing.
India can seek $25 billion from the IMF. While it may not be the usual IMF assistance that many countries have resorted to during the Lehman and Europe debt crisis, India can opt for a standing credit line facility. Even if India borrows $25 billion or so, it will still be a measly 4% rise in public debt. With fiscal consolidation process firmly on track, such borrowing will not significantly raise the debt burden of the government.