India’s first attempt at selling foreign debt is failing

Sitharaman that no work has been done on the mooted $10 billion offering.

India’s first venture into the overseas bond market would shift part of its Rs7-trillion ($100 billion, Dh367 billion) borrowing abroad, and enable it tap a wider pool of funds. But fears that it may increase the nation’s reliance on foreign borrowing has brought together an array of opponents.

“India has a historical aversion to issuing in foreign currency, and this has been institutionalised over time,” said Bryan Carter, London-based head of emerging-market debt at BNP Paribas Asset Management.

The fear is that India may tread the well-worn paths of other developing countries such as Argentina and Greece who were saddled with sizeable foreign borrowings after they failed to balance their budgets.

“The biggest benefit of the sale is the confidence that it signals to the world at large about India being confident of opening its economy,” said Duvvuri Subbarao, a former governor of the Reserve Bank of India. “But I fear this will become a thin end of the wedge. Once we see that it has become very successful, we might keep on doing it and get into pressure situations needlessly.”

While India has enjoyed average annual growth of 7.5 per cent in the past decade, it has a combined fiscal deficit of about 8 per cent of gross domestic product. The federal government spends about 20 per cent of its annual budget servicing domestic debt.

All of that means former central bank officials and a key political ally of Prime Minister Narendra Modi have spent the past weeks criticising the debt sale plan.

Forex buffer

Proponents for the sale point to a foreign-exchange buffer which is near a record $430 billion and a government which is widely perceived to be the most politically stable in three decades. Also, tight control over foreign inflows into onshore markets means India has fewer worries about capital flight than peers like Indonesia.

Availability of surplus liquidity in the overseas markets provides India an opportunity to access funds at lower borrowing costs, Prime Minister Narendra Modi told the Economic Times newspaper in an interview published on Monday. Additionally, India may have pricing power given the dearth of upcoming emerging-market issuance and the rising pile of negative-yielding debt worldwide.

According to estimates by QuantArt Market Solutions, India would need to offer 7.5 per cent interest on the overseas sale of rupee-denominated debt, an alternative that has been mooted. That compares with 2.7 per cent for US-dollar bonds, and yields of as low as 0.5 per cent the yen.

Recent Samurai debt sales by Indonesia and the Philippines offered yields of 1.17 per cent and 0.6 per cent respectively, while their dollar-denominated debt was sold at 3.45 per cent and 3.78 per cent.

“India has refrained from a foreign issuance up till now” due to multi-fold risks involved, and the main one being foreign-exchange gyrations, said Rini Sen, an economist in Bengaluru at Australia & New Zealand Banking Group Ltd. “When markets are in turmoil, debt issued overseas will be worse hit than onshore bonds as the latter can be repaid by printing more domestic currency.” for the euro and