From UPSC perspective, the following things are important :
Prelims level : Government Debt and its composition
Mains level : Public debt and related issues
The government is planning to issue 10 year bonds denominated in foreign currency.
Why it is a good idea
- Such borrowing would be cheaper because dollar or yen interest rates are lower than rupee interest rates.
- Our debt to GDP ratio is not very high, the exchange rate is stable, and foreign exchange reserves are high. So foreign borrowing, if its long term, is not a problem.
- If foreign bond issuance was accompanied by a move towards greater capital account convertibility then it may be worth pursuing.
- A country pays a country premium for borrowing in dollars; currently, the US 10-year bond is trading at 2%. A complex set of factors determine the country’s premium, but the magnitude of reserves and foreign currency debt are important attributes. India has less debt denominated in foreign currency, close to 5%. Thus, we should be able to borrow at a somewhat lower premium than 150 bp, possibly 130bp.
- Indian inflation has moved structurally downward over the last three years.
- It will also help to significantly lower the real repo rate to respectable levels.
Problems with these bonds
- Usually, the lower dollar interest rate is offset in the long run by higher principal repayments as the rupee depreciates against the dollar.
- Loss of sovereignty and may lead to currency depreciation
No country has grown at “trend” rates with a real repo rate of around 3.4%, not even 2.4% or 2%. Issuing bonds now is an idea whose time has come.