Borrow abroad and profit (Mint)

Mains Paper 3: Economy
Prelims level : Foreign Bond
Mains level : Issuing bond in forien currency

Context

The government is planning to issue 10 year bonds denominated in foreign currency.

Background behind this idea

• Such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates.
• Our debt to GDP ratio is not very high, the exchange rate is stable, and foreign exchange reserves are high. So foreign borrowing, if its long term, is not a problem.
• If foreign bond issuance was accompanied by a move towards greater capital account convertibility then it may be worth pursuing.
• A country pays a country premium for borrowing in dollars; currently, the US 10-year bond is trading at 2%. A complex set of factors determine the country’s premium, but the magnitude of reserves and foreign currency debt are important attributes. India has less debt denominated in foreign currency, close to 5%. Thus, we should be able to borrow at a somewhat lower premium than 150 bp, possibly 130bp.
• Indian inflation has moved structurally downward over the last three years.
• It will also help to significantly lower the real repo rate to respectable levels.

Major problems with these bonds

• Usually, the lower dollar interest rate is offset in the long run by higher principal repayments as the rupee depreciates against the dollar.
• Loss of sovereignty and may lead to currency depreciation

Conclusion

• No country has grown at “trend” rates with a real repo rate of around 3.4%, not even 2.4% or 2%. Issuing bonds now is an idea whose time has come.
• Cross-country evidence supports the conclusion that the sooner India engages in foreign currency borrowing, the quicker it can profit from this market imperfection.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to the Abetment of suicide, consider the following statements:
1. Abetment of suicide is a bailable offence under section 306 of the Indian penal code, 1860.
2. A person abetting the suicide of another person shall be punished with imprisonment up to 10 years and shall also be liable to fine.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both
D. None

Answer: B
Mains Questions:
Q.1) Why government is planning to issue 10 year bonds denominated in foreign currency?