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Foreign Currency Bonds: Should The RSS Oppose It?

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The Swadeshi Jagran Manch, the economic wing of the Rashtriya Jagran Manch has opposed the issuance of Foreign Currency Bonds.

"We can't allow this to happen," declared Ashwani Mahajan, the co-convenor of Swadeshi Jagran Manch (SJM), the economic wing of the Rashtriya Swayamsevak Sangh (RSS), according to a Reuters report.

Let's begin by understanding, what are Foreign Currency Bonds and if there is a justification in opposing them?

Foreign Currency Bonds: Should The RSS Oppose It?
 

What are Foreign Currency Bonds and what are the risks?

Foreign Currency Bonds are issued in a foreign currency and repaid in foreign currency, along with the principal and interest.

Now, the biggest risk here is that if the rupee depreciates, then you can end-up paying a lot higher. Let us explain: Say you issue 10 foreign currency bonds, when the dollar is at 70 to the rupee. You are able to fetch Rs 700 (10 bonds x 70). Now, if 5 years later, when repaying the bond holders, if the rupee has slipped to 100 to the dollar, you have to payback at 100, which means you payback Rs 1000, in place of Rs 700, when you had issued the bonds. We do not know the tenure of the bonds, and just assuming 5-years.

So, the biggest risk is the currency risk, which can bring instability to the rupee.

Will others dictate India's economic policies?

There was a concern that it may lead to faster depreciation of the rupee. This really depends on the quantum of the foreign currency bonds being issued. It is highly likely that the government knows what it is doing and would not go in for a very large issue.

It is almost unlikely to lead to foreigners dictating India's policies, as there is a strong government in place, with a sizeable majority. In the last 5-years, we have not seen foreigners dictating India's economic policies.

No comparison with Turkey, India much stronger

There are comparisons being drawn with Turkey, which had in the past borrowed from the international markets. One must not forget that India's fundamentals are much stronger. India's forex reserves are a staggering $430 billion (as of early July 2019), comprising Foreign Currency Assets (FCAs), gold reserves, Special Drawing Rights (SDRs). There is unlikely to be big instability caused by foreign currency bonds repayment, thanks to the huge reserves.

 

Apart from this, the forex reserves are growing at a brisk pace, and it will be only a matter of time, before it crosses the $500 billion mark. India remains one of the fastest growing economies, with low inflation, and solid demographics, which is way ahead of Turkey.

India can avail lower interest rates, on account of solid rating

India's sovereign credit rating is in the stable range (BBB-), so the country can raise money at lower interest rates. In fact, it could be in the range of 3 to 3.2 per cent, which is way lower than government bond yields in India, which are almost double at 6.36 per cent. Overall, it may not be a bad idea to borrow from abroad, given India's strong fundamentals, provided you restrict the quantum of Foreign Currency Bonds to reasonable levels, to avoid instability. So, should the RSS oppose it? It's all question of the size of the borrowings more than anything else. If it is really very large, which may cause instability, then probably "yes".

With liquidity in India already stretched, looking to the overseas market may not be a bad idea.

GoodReturns.in

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