THE GIST of Editorial for UPSC Exams : 03 August 2019 (Borrow abroad and profit (Mint))

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.

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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?