Budget 2019: Indian Government To Borrow In Foreign Currency

Budget 2019: Indian Government To Issue Sovereign Dollar Bonds

A U.S. one-hundred dollar banknote and Indian ten rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A U.S. one-hundred dollar banknote and Indian ten rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The Indian government will raise part of its gross borrowing requirements via foreign currency borrowings, Finance Minister Nirmala Sitharaman said while delivering her budget speech.

India’s external debt is currently low and the government will now start to borrow a part of its funding requirement from the overseas market in foreign currency, the Finance Minister said. The government did not specify what proportion of its borrowings would come through foreign currency borrowings, such as sovereign dollar bonds.

The decision marks a fundamental shift in the way India looks at its budget and its borrowing needs, said Abheek Barua, chief economist at HDFC Bank.

This is a very fundamental shift in the budgeting process and in the budgeting philosophy, in that we are seeking external funds for sovereign needs. This is a big deal and recognizes for the first time that domestic household savings are simply not enough to finance the enormous needs of the government and the related entities and leave anything substantial behind for the private sector. That’s a big reform measure.
Abheek Barua, Chief Economist, HDFC Bank

The Indian government has toyed with the idea of issuing sovereign dollar bonds in the past too, but has eventually decided against it. The option had been considered in 2013, when the Indian rupee was under pressure. However, it was thought that issuing a sovereign dollar bond at a time when India had wide fiscal and current account deficits was imprudent. Instead, the Reserve Bank of India announced a scheme to incentivise foreign currency non-resident (FCNR) deposits, which brought in nearly $34 billion.

Macroeconomic conditions in India are more stable now than in 2013. In 2018-19, the Indian government had a fiscal deficit of 3.4 percent. The current account deficit for the year was at 2.1 percent of GDP. India is also sitting on record high forex reserves of $426 billion.

While an Indian sovereign bond may see good demand, the government would need to ensure adequate liquidity by laying down a roadmap under which it issues a certain amount in sovereign dollar bonds each year to assure foreign investors of adequate liquidity.

India currently has no sovereign dollar bonds outstanding and most of its debt is rupee-denominated. The share of government debt in total external debt is also low. India’s sovereign external debt stood at $103.8 billion at end-March 2019, showed the latest data released by the Reserve Bank of India in June. The share of government debt in total external debt stood at 19 percent at end-March 2019. Much of this is from multi-lateral agencies and, hence, not subject to interest rate volatility.

Ananth Narayan, associate professor of finance at SP Jain Institute said it is about time India tapped foreign borrowings.

By actually borrowing from foreign markets and getting savings from overseas, you’re freeing up domestic savings for private investments....You also set up a  benchmark for onshore investors to to access the global market.  
Ananth Narayan, Associate Professor, SP Jain Institute
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