India Should Muster the Nerve to Go Ahead & Launch Sovereign Bonds

Sovereign bonds are difficult & risky, but also hugely accretive; we must have the nerve to go ahead & launch ‘em.

Sovereign bonds are hugely accretive

(Photo: The Quint/Shruti Mathur)

Video Editor: Mohd Ibrahim
Video Producer: Sonal Gupta
Cameraperson: Shiv Kumar Maurya

I had greeted Finance Minister Nirmala Sitharaman’s announcement on sovereign bonds with these words of joy, a day after her maiden budget.

One of the early bouncers she faced was hooked for six, when she announced that India would sell $ 10 billion of sovereign bonds in overseas markets. Whack! In one stroke, she moved the foreign currency risk on to her fiscal accounts, spread joy in domestic bond markets, and heralded lower local interest rates. I was thrilled that she was taking an entrepreneurial risk, especially since our foreign debt to GDP ratio is at an unnecessarily safe 3.8 percent.

Please read in between the lines of what I had written. It wasn’t an unqualified endorsement. I had underlined the difficulties – ie, acquiring complex hedging and treasury management skills in volatile forex markets. And I had called it risky during times of capital flight. And yet, because it was difficult and risky, I had called it entrepreneurial, pregnant with exciting possibilities and gains.

Naysayers VS Sovereign Bonds

But, as always, there were a lot of naysayers:

Ashwani Mahajan (RSS): “anti-patriotic act … allowing rich nations to dictate the country’s policies”

Yashwant Sinha (ex-BJP FM): “fraught enterprise in the current climate of a global trade war”

Raghuram Rajan (ex-RBI Guv’nor): “faddish investors buying when India is hot, dumping us when not”

C Rangarajan (ex-RBI Guv’nor): “risky”

Rathin Roy (PM Modi’s economic advisor): “serious issues regarding loss of sovereignty”

You have to rub your eyes to believe that über liberals, committed centrists, and ultra-right-wingers have aligned their otherwise clashing convictions to trash sovereign bonds. But their prescription, of killing this bold idea, is based on a flawed presumption: they have conflated “difficult” with “bad”, and “risky” with “harmful”.

So, Why Don’t We Examine Each Objection One-By-One

Objection: Volatile dollar/rupee rates will create “unquantifiable” costs in the long term

Counter: Wrong! By always hedging against future dollar rates, and paying a premium of 4-odd percent to do that, our costs will forever be controlled and quantifiable. This would push the total interest rate a few basis points higher than what the government could borrow at in local markets, but we should remember that these higher costs get compensated by several positives, including the fact that private borrowers get more cash in domestic bond markets.

Objection: Why go overseas when you can ask FPIs (foreign portfolio investors) to lend more in the domestic market, ie sell them more rupee bonds?

Counter: This one is utterly specious. There are millions of individual/institutional investors, perhaps holding trillions of investable dollars, who would not even think of venturing into alien/unfamiliar/illiquid markets (aka India’s bond markets) in an unknown currency (aka INR). So you are accessing an entirely new and untapped universe on, say, the NYSE. To equate them with a handful of authorized FPIs who can invest in India is to believe that chalk is as delicious as cheese.

Objection: India could stare at an international default in frightful, flight-ful times.

Counter: C’mon. India gets an annuity of nearly $70 bn from its hardworking sons and daughters living overseas who willingly repatriate to their loved ones left behind. NRIs have also kept an unflinching $100 bn in term deposits in their motherland. Finally, India’s forex reserves are nearly 43 times $10 bn (and growing). If we can’t muster the stomach for this much risk, let’s just quit (or take voluntary retirement).

Objection: The only advantage of sovereign bonds is lower interest rates; why not just ask RBI to reduce the repo?

Counter: This is rubbish. If a regulatory fiat could completely control/tame market variables, then why even bother with economic policies? The government should just say “Siri, create jobs, increase manufacturing to 25 percent of GDP, double farmers’ income by 2022, and reopen closed car showrooms”, and ping, it’s all done!

So my dear Indians, yes, sovereign bonds are difficult and risky, but also hugely accretive; and that’s precisely why we must have the nerve to go ahead and launch ‘em, but keep 'em on a tight leash.