High foreign debt to raise currency risks

India's plan to raise $10 billion from its first overseas sovereign bond runs a low risk as the global currency markets are stable and there has been an easing of the trade war between the US and China. The move is set to soften the domestic interest rates and boost private sector investment, which is seeing slow signs of revival after staying sluggish for more than two years.

A higher quantum of overseas borrowing could, however, heighten the risks, experts said. The timing for the debt in the foreign market is also good as the sovereign bonds from major economies like Germany, Switzerland and Japan are giving negative returns. India's borrowings so far have been from multilateral institutions like the International Monetary Fund (IMF), where there is no currency risk.

SBI chairman Rajnish Kumar said, "This gives the country another option to borrow. If the borrowing limit through this route is kept under check at $10 billion, as is being talked about, it will not pose a risk. Even a small country like Sri Lanka is raising money from sovereign bonds. As the government borrowing falls in domestic debt market, it will soften interest rates in India."

India's sovereign debt is lower than many other nations, and as of March 2019, it stood at $103.8 billion, 3.8% of the GDP.

India's total debt is 68% of the GDP.

Federal Bank executive director Ashutosh Khajuria says the government's borrowing would be "small" to pose any "big" currency risk. Besides, the external debt is less than 5% of the total debt of the country, he said. "This will reduce domestic interest rates. Though there is always a currency risk, the government will see to it the quantum does not pose any risk to the country."

Most of India's debt is rupee-denominated. In 2013, at the time of taper tantrums of the US Fed, the government considered the idea but never implemented it to overcome the fiscal deficit. Instead of overseas sovereign bond, the government decided to attract foreign currency non-resident (FCNR) deposits which brought in $34 billion.

HDFC Bank chief economist Abheek Barua said, "There is a currency risk but the government will hedge it."

HDFC Bank chief economist Abheek Barua said, "The borrowing via this route will help the local corporate bond market to develop. It will help the government to source cheaper funds from overseas and private companies will also be able to get cheaper credit in India due to lower government borrowing from the domestic market."

In the late nineties, India's quasi sovereign bonds were launched by IDBI Ltd (a financial institution then). In 2003, about Rs 3,000 crore of quasi sovereign bonds of IDBI and Rs 2,500 crore of IIFCL was restructured and rolled over. After it was rolled over, IDBI prepaid the debt.

"India's sovereign external debt to GDP is among the lowest globally at less than 5%. The government would start raising a part of its gross borrowing programme in external markets, in external currencies. This will also have a beneficial impact on the demand situation for the government securities in the domestic market," finance minister Nirmala Sitharaman said in her maiden Budget speech last week.