India’s foray into international debt markets may consist of little more than sound and fury, as the nation struggles to shed decades of trepidation about borrowing in foreign currencies. A fanfare announcement in the July budget has been followed by the removal of the official driving the sale, objections from the prime minister’s office, and finally an admission from Finance Minister Nirmala Sitharaman that no work has been done on the mooted $10 billion offering.
  1. India’s first venture into the overseas bond market would shift part of its 7-trillion-rupee ($100 billion) borrowing abroad, and enable it tap a wider pool of funds. 
  2. But fears that it may increase the nation’s reliance on foreign borrowing has brought together an array of opponents arguing that currency volatility and elevated debt costs would ruin the country.
  3. India has a historical aversion to issuing in foreign currency, and this has been institutionalized over time. Policymakers “see it as an unnecessary risk to open up to foreign capital flows and subject themselves to the mercy and whims of international investors.”
  4. The fear is that India may tread the well-worn paths of other developing countries such as Argentina and Greece who were saddled with sizable foreign borrowings after they failed to balance their budgets. 
  5. The biggest benefit of the sale is the confidence that it signals to the world at large about India being confident of opening its economy. But the fear and concern that strike me are that this will become a thin end of the wedge. Once we see that it has become very successful, we might keep on doing it and get into pressure situations needlessly.
  6. India has enjoyed average annual growth of 7.5% in the past decade, it has a combined fiscal deficit of about 8% of gross domestic product. The federal government spends about 20% of its annual budget servicing domestic debt.
  7. The rupee has depreciated in seven of the past 10 years. The Indian currency fell 0.4% to 71.0750 per dollar. The yield on benchmark 10-year bonds rose two basis points to 6.51%.
  8. Proponents for the sale point to a foreign-exchange buffer which is near a record $430 billion and a government which is widely perceived to be the most politically stable in three decades. Also, tight control over foreign inflows into onshore markets means India has fewer worries about capital flight than peers like Indonesia.
  9. Availability of surplus liquidity in the overseas markets provides India an opportunity to access funds at lower borrowing costs, Prime Minister Narendra Modi told. Additionally, India may have pricing power given the dearth of upcoming emerging-market issuance and the rising pile of negative-yielding debt worldwide.

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