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Dr. Rajan is an honourable man

They are all honourable women and men who have been expounding on the evils of issuing sovereign dollar bonds. It’s considered sacrilegious to speak against the reigning diva of the Indian financial markets but in this case I would like to humbly suggest that Dr. Rajan is wrong. I have always been a fan of the good Doctor and deeply admire what he accomplished as Governor. However his perspective is that of a regulator and not of a market participant or trader. I do not represent a multinational investment bank and as such my views are very personal. Though if I may add many of these bankers have passed out from the same eminent schools that Governor Sahab has been associated with and may even have been his batch mates.

My views on the points raised by Dr. Rajan are given below.

1. Yes our foreign debt is low and no our fiscal has not dramatically improved. It’s for these very reasons that it makes sense to issue overseas. Our overall debt is high and it makes sense not to concentrate all borrowings in one currency. Our FX reserves are more than adequate to service this debt.

2. The borrowing is to finance the public sector. This financing need is growing and unfortunately given the profligacy of the govt, will keep increasing. Yes the FPI limit can be increased instead of borrowing offshore. The difference is the currency risk. The rupee is always going to be under pressure so long as there is a question on the deficit number. If the govt is confident about its numbers it should have no problem bearing the currency risk. Also we have enough tools to hedge this risk.

3. Will dollar bonds reduce local currency debt? Yes. But only if the govt wants to. If they use the dollar debt as incremental borrowing we are in trouble. As for rupee liquidity surging on the conversion of these dollars to rupees, isn’t that what we want? There is a liquidity crunch remember. The argument is that OMOs will be used to sell bonds and absorb this liquidity and so local issuance will still rise. Maybe. But this issuance could be short term t-bills while the dollar bonds will be for 10 yrs. Also one could use FX swaps to neutralize liquidity. Or you may not even convert the dollars. We have a lot of dollar payments e.g. Oil and Defence. India could very well run a parallel dollar balance sheet. We have the assets and now the liabilities. These are dollars not radioactive material. Let us not get frightened of it.

4. Cost of funds. Yes dollar borrowing costs are amongst the lowest ever right now. There is however a swap or hedge cost which needs to be kept in mind. But given the current costs it does make sense to borrow long now. Rates are going negative worldwide. If you don’t lock in now when will you do it?

5. Countries borrow offshore only when they can’t borrow more onshore. True. In case one is not aware we ARE at that stage now. Ask any bond trader. The market cannot absorb anymore local debt. If it were not for this dollar bond announcement and the liquidity infusion the 10 yr would have been still 9%! Wake up and smell the coffee! We are in crisis mode. The dollars don’t need us, we need them.

6. As regards new investors, does not every issuer want to diversify its investor base to reduce concentration risk. Have we forgotten that just a year ago local bonds were devolving and even the captive govt banks were refusing to buy? Registration and taxation is an issue in India. The current budget with the taxation increase has added to it. Let us not fool ourselves that the world is waiting to invest in India. We are one among many and need to sell our case. However crude that may sound.

7. Offshore markets driving Indian markets. We want to get global yet want to be secluded ? You can’t have your cake and eat it too. NDFs impact onshore spot. Similarly sovereign bonds will impact local bonds but in a very limited way. The macros are different and so are the outstanding amounts. Let us not see demons where none exist. There are abundant rate and FX hedging tools to manage our risk. In any case the bulk of these sovereign bonds will initially be held by offshore branches of Indian banks. We can control the issuance and ensure the bonds don’t get hammered. And if they do it will be an early warning signal to us on our fisc.

8. Yes a sovereign dollar yield curve is essential. Believe me I have traded India credits offshore. Investors need a CDS market to hedge and for that a sovereign curve is essential. It will not only reduce the borrowing cost of other Indian credits but also enable structures which increase FPI flows into India.

9. As regards investment bankers, they are non rip off artists they are just regular people (mostly Indian), doing their jobs. They will do this bond issuance at virtually zero fee in the hope of some mythical future pay off which will never accrue. That is not to say that we trust them blindly but do we not have enough intelligent bankers in India who will negotiate the best deal for us? The ICICIs, Kotaks and HDFCs will happily do this for the govt.

10. Are dollar bonds an addiction? If yes then every country from China to Chile is tripping. It’s merely another source of finance. The tap is in your hands. If we have confidence in ourselves there is nothing to worry. Put safeguards in place. Set a cabinet or parliament approved limit.

11. As for internationalising the rupee, let us not fool ourselves. Given the existing controls and our fiscal, the rupee is no way close to replacing the dollar. Even the Yuan hasn’t got there yet. Let’s get our own house in order before taking over the world.

It is time for us to get our heads out of the sand. The whole world is not waiting to destroy our markets. Nor are they lining up to rush into India. Let it be clear, we are one amongst many. We need to pitch our case and sell it as much as the next guy. Luckily for us there is a global risk off with falling yields which makes our case slightly easier. Let us capitalise on this opportunity, keep adequate controls and risk management measures in place and let the dollars flow.

*Rajeev P. Pawar is the Group Head, Balance Sheet Management and Investment at Edelweiss Financial Services. An experienced India and Emerging Markets Treasury specialist, he has set-up and run successful ALM and Trading desks in Singapore, Dubai and India. (The views expressed in all posts are his own personal views and do not represent the view, strategies or opinions of Edelweiss group)

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