As part of a two-pronged strategy to deal with the excessively high current account deficit (CAD) and infrastructure woes, the government has confirmed on Thursday that it would invest $4.3 billion, or Rs 27,000 crore, in special private placement bonds (SPPBs) issued by the World Bank, in order to stay eligible for low-cost funding by the latter for domestic infrastructure projects.
With the help of this first-of-its-kind investment, India can borrow $4.3 billion over and above the single borrower limit of $17.5 billion.
The Reserve Bank of India will utilise the country’s foreign exchange reserves to buy SPPBs from the International Bank for Reconstruction and Development (IBRD), an arm of the World Bank group. As on August 30, India’s foreign exchange reserves stood at $275 billion, lower by $15 billion as compared to same period last year.
The Union Cabinet, which cleared the investment, said the additional borrowing space will enable the government to commit to new projects with IBRD assistance.
“This is a confidence-enhancing measure. Keeping all funding sources accessible at a time when government finances are tight is a good move,” said Dharmakirti Joshi, chief economist at leading ratings agency Crisil.
He said the move will help alleviate funding constraints, particularly for infrastructure investment and increase supply of dollars.
A finance ministry official said, “Since the bond buy will also be an investment, the returns will help the country on the current account deficit front.”
India’s eligibility for World Bank funding has come down over the last few years due to the country’s higher income levels. These loans are typically concessional or interest-free and spread over longer tenures; thus, they are a cheaper avenue compared to other sources of international funding.
Buying the bonds will help India become eligible for higher levels of funding from the World Bank, which will subsequently be utilised for the infrastructure spend that is estimated to be $1 trillion till 2017.
The proposed investment would enable India to leverage World Bank’s knowledge base and global reach for transfer of knowledge, adoption of good practices, reforms of processes and systems and capacity building, said a government statement.