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[00:00:00] Rise Above The Din, Unbox The News With Me, Raghav Behal I had greeted Finance Minister Nirmala Sita Raman's announcement on sovereign bonds with these words of joy and this was a day after a maiden budget.
[00:00:19] This was the first bouncer Finance Minister Nirmala Sita Raman just hooked for a big six. Whack! In one stroke, she moved the foreign currency risk onto her fiscal accounts. She spread joy in domestic bond markets and heralded lower local interest rates.
[00:00:36] Frankly I was thrilled that she was taking an entrepreneurial risk especially since our foreign debts to GDP ratio is at an unnecessarily safe 3.8%. Now please read in between the lines of what I had said and written. It wasn't an unqualified endorsement, I had underlined the difficulties that is
[00:00:58] acquiring complex hedging and treasury management skills in volatile foreign exchange 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 and that is pregnant with very exciting possibilities and gains.
[00:01:20] But you know what as always there were a lot of naysayers. Ashwani Mahajan of the RSS it's an anti-patriotic act allowing rich nations to dictate the country's policies. Yashwansina, ex-BJP Finance Minister it's a fraught enterprise in the current climate of a global trade war.
[00:01:39] Raghuram Rajan, ex-RBI Governor, faddish investors buying when India is hot and dumping us when not. Sri Rangarajan, ex-RBI Governor it's risky. Ratan Roy, Prime Minister Modi's economic advisor. Serious issues regarding loss of sovereignty.
[00:01:58] Now you really have to rub your eyes to believe that Uber Liberals, committed centrists and ultra-right wingers all of them have aligned otherwise you know they've got clashing convictions but here they've aligned to trash sovereign bonds.
[00:02:15] What 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? Here's objection number one.
[00:02:35] Volatile dollar or rupee rates will create unquantifiable costs in the long term. This is wrong. I wish to buy the bond in 2019 and at present $1 is 68 rupees. What if by 2020 $1 is 75 rupees? You know what?
[00:02:53] I wish to hedge against future dollar rates and pay a premium of 4 odd percent to that. 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.
[00:03:11] Now I concede that this will push the total interest rate to perhaps 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
[00:03:26] the fact that private Indian borrowers will get more cash in domestic bond markets. Now let's look at objection number two. Why go overseas when you can ask foreign portfolio investors to lend more in the domestic market that is sell them more rupee bonds? Here's my counter.
[00:03:44] This one is quite specious. There are millions of individual and institutional investors perhaps holding trillions of investable dollars who would not even think of venturing into alien and unfamiliar and ill liquid markets and these you know that these are what Indians India's bond markets are
[00:04:06] in an unknown currency and that's what the Indian rupee would be to them. So you are accessing an entirely new and untapped universe on let's say the New York Stock Exchange. To equate them with a handful of authorized FBI's who can invest in India is you know
[00:04:25] is in a sense to believe that chalk is as delicious as cheese. Now here is objection number three. India could stare at an international default in frightful, flightful times. India gets an annuity of nearly 70 billion that's billion with a B from its hardworking
[00:04:46] sons and daughters living overseas who willingly repatriate to their loved ones left behind. Non-resident Indians have kept an unflinching $100 billion again billion with a B in term deposits in their motherland. Finally India's foreign exchange reserves are nearly 43 times $10 billion that's about $430 billion and these are growing.
[00:05:13] If we can't have the stomach for just this small risk of $10 billion of sovereign bonds let's just quit you know or take voluntary retirement. Here's objection number four. The only advantage of sovereign bonds is lower interest rates. Why not just ask RBI to reduce the repo?
[00:05:34] This is rubbish. If a regulatory fiat could completely control and tame market variables then why even bother with economic policies the government should just say Siri create jobs, increase manufacturing to 25% of GDP, double farmers income by 2022 and please reopen closed car showrooms.
[00:05:58] And ping Siri does all of that. 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 them but keep them on a tight leash.
[00:06:20] Thanks for listening tune in next week for another episode of Raghav's Take.