Overseas Bonds

The Indian Finance Minister had in her budget speech announced that to raise funds, India would opt for the issue of overseas bonds. While some economists call this move of the Indian government unplanned and unnecessary risk, the Indian Government is sticking to its plan as it belies than an overseas bond issue will spur domestic private investment in the country.

What is an overseas bond issue?

An overseas bond is a form of government debt in which it issues bonds with the solemn promise to pay the interest on the bond periodically and will repay the entire face value of the bond after the date of the maturity.

Is the issue of the overseas bond beneficial?

The Indian government claims that the government borrowing inside India is reducing funds available for the private sector. The private sector also requires cash to satisfy its credit and investment requirements and the lack of funds for the private sector means that it cannot invest adequately.

Are there any risks?

  • Historically, In the 1970s, a few countries in Latin and South America borrowed heavily in overseas markets. At that time, the global market was riven with liquidity. However, when the currencies of these countries depreciated, these countries could not repay their debt.
  • An issue of the overseas bond would lead to an increase in the foreign exchange reserves of the country.
  • This will strengthen the rupee which is already appreciating against the dollar.
  • A stronger rupee would increase imports and discourage exports when the Indian government is just trying to do the opposite.
  • If the depreciation of the rupee takes place, then it would prove to be even more disastrous for the Indian economy as it would increase complications its ability to repay its external debt.

What do the numbers say?

India?s sovereign external debt to GDP ratio is one of the lowest (nearly 5%) in the world. A little borrowing won’t upset the Indian economic plans anyway.

How the Indian government is going about this plan?

Since the Indian government has only borrowed in domestic markets, it plans to test the waters and borrow only about USD 10 billion. This will amount to only 10% of its gross market borrowing.

 

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