Risky money: India to issue foreign currency bonds

India's Ministry of Finance has announced plans for its first foreign currency bond sale, which could raise an estimated $10bn for the country though critics are calling it a "dangerous move" [Dhiraj Singh/Bloomberg]

An influential Hindu nationalist group close to Indian Prime Minister Narendra Modi’s ruling party has demanded that his government review its plan to raise money by selling foreign currency bonds.

Bonds are a form of borrowing money. These particular bonds would be issued in a foreign currency, meaning the principal repayment and periodic interest payments will not be made in Indian rupees, but rather in a foreign currency. If the rupee devalues, it will become more expensive for India to pay off this form of debt.

Critics say the plan to issue foreign currency bonds is anti-patriotic as it could create long-term risks for the economy, potentially allowing rich foreign nations and their financial institutions to dictate India’s policies.

“We can’t allow this to happen,” declared Ashwani Mahajan, the co-convenor of Swadeshi Jagran Manch (SJM), the economic branch of the right-wing Hindu organisation Rashtriya Swayamsevak Sangh (RSS).

The RSS was the key founder of the ruling Bharatiya Janata Party, and people it has nurtured – including Modi himself – are in top positions in the government.

Declaring that the SJM will campaign against the plan by convening meetings of influential economists, Mahajan said, “We are confident that government will withdraw its decision on these bonds.”

“We must look at the experience of countries that have taken loans from international markets to meet their government deficit. The experience of these countries has been far from good,” he said, citing Argentina and Turkey as examples.

A spokesman from the Ministry of Finance declined to comment for this story.

Subhash Chandra Garg, the top official at the finance ministry, told Indian business leaders last week that the overseas debt move was part of efforts to bring down real interest rates for Indian companies in order to help the economy grow faster.

“We will have a very open attitude to welcome foreign investment and savings because that is what would be required,” he said.

Garg said that the problem with relying so much on domestic debt was that the government tapped into nearly 80 percent of total savings in the economy, leaving little for private companies. As a result, those businesses are forced to pay up to 13 percent in interest rates on bank loans.

The government has in the past considered raising funds from overseas markets, but those tasked with determining the feasibility of such a plan have ended up advising against it.

“Most of the debt is of domestic origin, insulating the debt portfolio from currency risk,” India’s previous finance minister, Arun Jaitley, wrote in a paper on public debt in February of last year.

‘Faddish investors”

It is not only the RSS’s economic branch that has criticised the government for the proposal.

India should worry about short-term “faddish investors buying when India is hot, and dumping us when it is not,” former Indian central bank governor Raghuram Rajan wrote in an article for the Times of India newspaper last Saturday.

The SJM has shown it can mobilise opinion to change government policy on several occasions in the past few years, including pushing the government to take a harder line against genetically modified crops and a more protectionist stance on trade issues.

The SJM helped to pressure the government into introducing new e-commerce regulations in February that upset two American behemoths, Inc and Walmart. The US companies said the move discriminated against them and favoured domestic retailers.

But the BJP may not bend on this occasion.

Gopal Krishna Agarwal, the BJP’s national spokesman on economic affairs, said that despite some risks highlighted by critics, the sovereign bonds are the “best alternative” at this point considering the government’s massive investment plans.

The government’s goal of keeping real interest rates low makes it difficult to raise funds in the domestic market at reasonable rates, he added.

Agarwal cautioned, however, that the government has to stick to its fiscal deficit target of 3.3 percent of gross domestic product for the current year ending next March and ensure that overseas borrowing does not lead to a higher deficit.

Lower costs

India’s sovereign credit rating is in the stable range (BBB-), so analysts suggest that based on current market rates, the country would be able to raise US dollar funds overseas at about 3.2 percent. That figure could rise once hedging costs are taken into account.

The 10-year government bond, the most liquid bond in the domestic debt market, closed at 6.33 percent on Tuesday.

Overseas borrowing exposes the government’s liabilities to currency fluctuations, and can therefore impact domestic interest rates.

“India’s vulnerability to external events is very high given its disproportionately high dependence on imported oil,” said Rupa Rege Nitsure, group chief economist at L&T Financial Holdings.