the-option-of-corona-bonds-for-india-summary

Context: India might have a window abroad for raising funds to tackle its COVID-19 crisis. An open economy with low external debt can possibly bear the extra burden.

COVID-19 and need for raising funds from outside

  • India could do with a stimulus shot against the ravages of coronavirus pandemic that is both sharper and bigger, and central finances can be stretched a bit considering the nature of the threat.
  • The worst of this CoVID-19 crisis is still ahead of us. That means we are at a critical juncture in our response, and no window of funds should be left out of the reckoning, especially not a capital market abroad that could snap up Indian corona bonds issued in dollars.

Background of India’s capital inflows

  • Servicing debt in US currency has not been detrimental to India since 1991.
    • During 1991 India was on the verge of an external default. However, India opened its economy to the world, gave market forces some freedom, and achieved a turnaround. 
  • Cushion of Foreign Exchange reserve
    • If the scare of 1991 left us looking at our foreign exchange reserves as a capital cushion on the global front.
    • The Asian Crisis of 1997 positioned this buffer as a war-chest against the potential chaos of capital flight and a rupee crash.
  • Financial inflows
    • Financial inflows over the years have been robust in India. 
    • Currently, our central bank has over half a trillion dollars piled up.
      • RBI has recently mopped up billions more in an effort to reduce rupee volatility under a greenback insurge brought about by equity sales by companies such as Reliance.

Considering the existing scenario in India, barring a shock to our currency, various estimates suggest that India can afford the burden of at least $40 billion a neat ₹3 trillion in extra foreign debt.

Does the global market have an appetite for government bonds? 

  • With global demand for low-risk paper soaring and yields dipping below zero, safe bonds that pay well could attract investors. 
  • External debt of India:
    • India’s external debt so far has been modest. The country began 2020 with only about $564 billion of it, a little more than one-fifth of gross domestic product. 
      • Of this external debt, the government owed just $110 billion, with corporate loans and non-resident deposits making up the bulk. 
    • Given its spotless payback record, India just have to price these bonds appropriately, and maybe our diaspora alone could stump up $20 billion.

 

Way ahead

  • India’s exports have been weak, capital inflows could prove unreliable, and if the rupee happens to slide, the plan could turn out costlier than bargained for. 
  • However, a go-ahead for it should go by what exactly is envisaged as a self-reliant India. 
    • A reversal of our economy’s integration with the rest of the globe’s, if trade barriers or capital controls are imposed, would turn forecasts of our external balances worrisome
  • As we learned that before 1991, imports restricted to essentials are hard to pay for with the earnings of exports that are price-sensitive, and money that cannot exit easily tends not to come in. 
  • Ultimately as far as India does not plan to close itself off, the country can safely borrow in dollars. At the very least, India can keep this option open.

Source:https://www.livemint.com/opinion/online-views/let-s-keep-the-option-of-corona-bonds-open-11592145552023.html

Image Source: Mint