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Foreign Currency Borrowings

Published on Tuesday, August 27, 2019
 Foreign Currency Borrowings
  • The Finance Minister had recently announced that the government would start raising via government bonds in external markets in external currencies.

About Government Bonds

  • A government bond is a form of debt wherein it issues bonds with the promise to pay periodic interest payments and also repay the entire face value of the bond on the maturity date. So far, the government has only issued bonds in the domestic market.
  • Government bonds can be denominated in both foreign and domestic currency.

Factors responsible for going towards Foreign Currency Borrowings

The idea of the Indian government borrowing in foreign currency has been discussed multiple times earlier in the 1990s, in the early 2000s etc. Each time the possibility of a sovereign foreign currency bond was put on the table. This time, though, it is a different vulnerability that has prompted the government to announce that it will consider borrowing overseas. These are as follows:
  • Foreign borrowings are among the lowest globally: At the end of March 2019, the total sovereign debt stood at $103.8 billion, which was 3.8 per cent of the GDP.
  • Low Current Account Deficit: As a percentage to GDP, it was 2.1 per cent in 2018-19 and was financed comfortably by capital flows (both debt and equity).
  • Most of the external sector vulnerability indicators are stable: Debt to GDP (19.7 per cent), debt to forex reserve (76 per cent), debt service ratio (6.4 per cent) and forex reserve to import cover (eight months) are stable.
  • Volatility of the rupee: The volatility of the rupee is least among the emerging market economies. It shows the amount of resilience in the external sector.
  • Strong Macro-economic indicators: Though economic growth has slowed down, it is highest in the global context and is accompanied by a benign inflation outlook.
  • Strong commitment by the government for fiscal consolidation: Due to the status of Indian government outside the present initiative will be well received by the global market, even though the debt (68 per cent of GDP) is at a higher level for the general government (both Centre and the States).
The government is hoping that by diverting a part of its borrowings overseas, it will free up the domestic financial savings pool for private use and bring down interest rates. The government plans to borrow 10-15 per cent of the total borrowing offshore, which can be used to mop up at least Rs 70,000 crore, according to tentative plans.

Pros of the initiative:

  • Address the shallowness of bond market which exists in India: especially at a time when the government needs the bond market to finance several of its commitments such as the Ujwal Discom Assurance Yojana (UDAY) scheme. As an issuer, the government will get the benefit of diversification of investor bases with a global presence, and there could be some easing of pressure on the domestic bond rates.
  • Frees up resources for domestic savings and production: which can boost private investment in the country, as they will have funds to adequately meet its credit and investment needs. As less domestic funds would be sought by the government, it would reduce yields in the Indian bond market, help banks pass on policy rate cuts to their loan customers.
  • Less expensive sourcing of resources: It is the perfect time to raise the money, considering that overseas yields are low, and some European bonds have even dipped in negative territory. So foreign money can be raised quite cheaply, at less than half the domestic rate, by one estimate.
  • It creates a benchmark for Indian companies to raise money abroad. Also, if Indian sovereign bonds become part of international market indices, their prices would set a reliable interest rate benchmark for overseas credit sought by Indian firms, which should ease their access to foreign loans.
  • Force Financial Discipline on Governments: by not allowing fiscal slippage. Also, the overseas borrowing programme allows the government to maintain its gradual reduction of the fiscal deficit.


  • Exposed to the global vulnerabilities: In the past, India has managed to survive at 6.5 per cent of fiscal deficit. It didn’t suffer from the credit crisis because the sovereign bond was not held by foreign investors, who could short sell the bonds and create panic in the domestic market. With an overseas bond issue, the government would not be able to inflate itself out of trouble. If the rupee weakens over the tenure of the paper, the government’s payback burden would increase, since it would take more rupees to buy each dollar, euro, yen, etc.
  • Could turn out to be costlier: The volatility in India’s exchange rate is much greater than the volatility in the interest rates of India’s G-Secs. It means that although the government would be borrowing at cheaper rates than those domestically, the eventual rates after incorporating the weakening of rupee against the dollar might make the deal costlier.
  • Might make the exports less competitive: Overseas borrowings would lead to a quicker increase to its foreign exchange reserves, which would lead to a stronger rupee. A stronger rupee would encourage imports at a time when the government is trying to curb them.
  • May not lessen the pressure on domestic market: It has been argued that borrowing outside would not necessarily reduce the number of government bonds the domestic markets have to absorb. If fresh foreign currency comes into the economy RBI has to neutralize it by sucking the amount from the money supply, this would require selling of more bonds.
  • International examples- Several economists have expressed their concerns over the fact that India might follow the path of some Central and South American countries such as Mexico and Brazil. In the 1970s, several of these countries borrowed heavily overseas when the global market was flush with liquidity. But then, when their currencies depreciated sharply a decade later, these countries were in big trouble, as they could not repay their debt.

Way Forward:

  • India needs to take a measured approach in dealing with foreign borrowings, by not allowing its percentage to total borrowings slip out of hand.By issuing the bonds, the government will have to manage its policies extremely well. And this would require fiscal discipline since all sorts of investors would be looking at India’s numbers closely.
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