What went wrong with Modi govt’s sovereign bond plan

Foreign Currency Bond: Previous governments have also borrowed in foreign currency in past but it was done silently.

Dollar, Sovereign Bond, Foreign Currency Bonds, India
Modi govt's decision to borrow through foreign currency bonds has faced severe criticism.
Dollar, Sovereign Bond, Foreign Currency Bonds, India
Modi govt’s decision to borrow through foreign currency bonds has faced severe criticism.

Sovereign Bond: Prime Minister Narendra Modi’s government has apparently applied brakes on the finance ministry’s proposal to issue sovereign bonds in foreign currency. Finance minister Nirmala Sitharaman in her maiden budget had announced the government’s intention to borrow from the overseas markets. Media reports put the government’s external borrowing target at $10 billion by October. The move faced criticism from several quarters, including two former Reserve Bank governors, forcing the government’s hand to reconsider the plan. Finance secretary Subhash Chandra Garg’s sudden departure from the finance ministry is also linked to the PMO’s decision to apply brakes on India’s maiden overseas bond sale.

Subhash Chandra Garg was considered the key official behind the proposal to issue foreign bonds. However, he announced his intent to take premature retirement from the civil services after he was shunted out of the finance ministry following the outcry over the government’s decision to borrow from abroad through foreign currency denominated bonds.

Former bureaucrats who have handled India’s borrowins in the past say that it’s not for the first time that the government will borrow from abroad in foreign currency. However, what is unusual is that the government has announced its decision well in advance.

“India had done this sort of external commercial borrowings for domestic gap financing when we were getting into serious foreign exchange crisis in 1987-1988,” said a former senior bureaucrat who was involved in raising money from abroad at that time.

The former bureaucrat, who held senior positions in the ministry of finance, was critical of the government’s decision to announce its intent in the Union budget as it will allow foreign buyers to exploit the situation.

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“The money is eventually to be raised through foreign bonds then they will exploit the situation as they know that you are dependent on them,” he said.

Successive Union governments have followed a conscious strategy to reduce India’s foreign debt. A fact that was endorsed by Nirmala Sitharaman in this year’s budget when she said that India’s total foreign debt was less than 5% of the country’s GDP, among the lowest in the world. Her predecessor Arun Jaitley also praised the strategy followed by past governments to reduce the foreign borrowings and rely on long term concessional borrowing which is free from market volatility.

“Most of the debt is of domestic origin insulating the debt portfolio from currency risk. The limited external debt, almost entirely from official sources on concessional terms, provides safety from volatility in the international financial markets,” Jaitley had said in the government’s debt status report of 2018.

However, experts differ with the government’s official position that the country’s external debt was largely free from currency fluctuations and market volatility. Officials who have been involved with government’s sovereign borrowing in the past say that even concessional loans raised through multilateral institutions such as World Bank are not free from volatility.

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“World Bank loans have three different groups of currencies and loan is distributed among those currencies and if any one of the currency appreciates much faster than yours then you get hit,” said a former finance ministry official.

Issue of volatility depends on several things including the country’s central bank’s ability to handle currency fluctuations.

“Volatility is not just a function of one thing. You can say that you’re good but it depends on RBI’s clout. How much money they can play in the market,” said the former official while elaborating that the country may not be able to control the volatility if it is suddenly hit by high oil prices and if its other payment obligations including that of private-sector go up simultaneously.

They caution against borrowing from abroad on a routine basis and also giving advance knowledge to foreign brokers.

“I would not like to announce it. I will do it on a need basis,” said a top former finance ministry official.

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