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Podcast: Should The Indian Government Borrow From Abroad? (Episode-9)


‘About 40% of all the of money that you’re paying as tax is going not to build infrastructure, not to feed the hungry, not to pay farmers for food! It’s going towards interest payments on the debt the government has borrowed in the past. Why would this be a problem? Because we borrow debt at extremely high rates’- Deepak Shenoy

Host Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) discuss about Nirmala Sitharaman’s controversial decision to raise $10 billion by issuing India’s first overseas sovereign bond.

We discussed five broad topics:

1) Should India borrow abroad, if yes, then why? (10 mins)

2) Domestic liquidity issues and crowding out effect (8 minutes)

3) Why are experts (Ex- RBI governors) against this move? (3 mins)

4) What are risks of going overboard with overseas borrowing? (4 mins)

5) Risks of borrowing abroad and final thoughts (15 mins)

Here’s the podcast: (See more episodes at The Capitalmind Podcast.)

Below is an excerpt of the podcast with time stamps of important sections, followed by the verbatim transcript of the podcast.

1.Should India borrow abroad, if yes, then why? (2:00)

The government borrows roughly INR 5 lakh crores net per year. In the next year, the estimate of tax revenue that government will collect is about 16 lakh crore, out of which the government will pay 6.5 lakh crores in debt interest payment.

About 40% percent of all of money that you’re paying as a tax, is going not to build infrastructure, not to feed the hungry, not to pay farmers for food. It’s going towards interest payments on the debt they borrowed in the past.

Why would this be a problem? Because we borrow debt at extremely high rates. Domestically. And here’s the important thing, India’s own companies that borrow abroad (ONGC for an example) has a bond issued in euros and euro denominated debt…

2. Domestic liquidity issues and crowding out effect (10:40)

What some of the economists have put across is this, Indian Government is borrowing 3.3% of gross financial savings and 2.2% is by states and some 4% is something else. And therefore, India’s gross financial savings is about 10% of GDP. Out of which about 8% of GDP is borrowed by the government, my answer to that is that’s not true!

3. Why are experts (Ex- RBI governors) against this move? (18:00)

About 1% of GDP is about 2 lakh crores. How much are we suggesting they borrow? About 75,000 cr. That’s just 0.4% of GDP. I think it’s too small. I think in any given year, you can say don’t borrow more than 1% of GDP. That’s fine.

I don’t think India will see appetite for more than 10 billion euros at this point, which is about 70-75,000 crores thousand crores. I don’t think any more appetite exists right now because everybody wants to wait and watch. And I think this is a good start. If there is an appetite, of course, we can look at more, I think you know, go and give more and buy a lot more, especially if they’re going to give it to you at negative rates, just go and borrow as much as you can, up to say 10% of the total debt…

4. What are risks of going overboard with overseas borrowing? (21:00)

The problem is that, what if another government is in power, right?. What if the same government is in power?

Your problem is this, you’re creating debt, it could be a poison- poisoning the well phenomenon. And the idea is that poisoning the well is like, when people used to attack another country which had a fort, the idea was to throw poisoned frogs, rags, with darts and arrows. Some of them could fall inside a well which would then get poisoned, then nobody would have any source of water and everybody would die.

Poisoning the well is to say to the next person that comes here, he will not enjoy that place because the water will be poisoned, they won’t be able to drink the water. If you poison a well, you too can’t come back!

5. Risks of borrowing abroad (24:50)

I think the point is if we borrow $100 at 70 rupees, we get INR7,000. We may get it at 0.45%, but three years later rupees or 100. And then we return the hundred dollars and we return 10,000 rupees.

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Aditya: Hello everyone and welcome to another episode of The Capitalmind Podcast. Today I have with me Deepak Shenoy, and we’ll be talking about should India borrow from abroad. Deepak, welcome to the show.

Deepak: Hi Aditya. This has been a wonderful series of podcasts. Thanks everyone for your fantastic response to the previous podcast. Today we’ll talk about another controversial topic. The economists hate it, the market doesn’t know what to do with it, everybody else is wondering what the whole fuss is about. Can the Indian government borrow outside of India, from foreigners, those dirty people who are out to ruin our country. Can we borrow money from them? Be indebted to them. Let me just take you through a little bit of the logic behind this, and I have a bunch of questions. Let’s take it one by one.

Aditya: Sure, sure, Deepak. My first question is very simple and it’s why? Could you please give us a couple of reasons, say three reasons why India should borrow from abroad?

Deepak: There is a good reason why we should think of this differently. We borrow, the garment borrows roughly five lakh crores net per year. In the next year, that is the estimate of revenue that we’re going to collect. Just taxes. India’s going to collect about 16 lakh crores. The government will pay 6.5 lakh crores in debt, interest payment. 40% of all of money that you’re paying as a tax is going, not to build infrastructure, not to feed the hungry, not to pay farmers for food, none of that. It is going towards interest payments on the debt that they’ve borrowed in the past.

Aditya: It’s huge.

Deepak: Why would this be a problem? Because we borrow debt at extremely high rates. But here’s the important thing, India’s own companies that borrow abroad. Now I’ve taken ONGC for an example. ONGC has a bond issued in euros, and Euro denominated debt. We know that most of the Euro countries are now borrowing in negative rates minus, even the 10 year rates are negative. ONGC, which is an Indian company of course owned by the government, has issued bonds in the Eurozone. Those bonds are trading currently in the market at 0.47% yields, which means for a bond of let’s say $1 million, you’ll pay $4,700.

Aditya: That’s it?

Deepak: That’s the amount of interest you pay, and this is just in euros. That’s all. What is the Indian government paying today? For the same 10 year bond, I know ONGC is a five year, but let’s just say 10 year bond. India’s paying 6.6% today. So we’re paying a 6% higher rate for borrowing in rupees. Then perhaps if this government did borrow in euros, you’d pay 0.45%. Is it worth it? Is it not worth it? We’ll come to that. But the point is this, you’re saving 6% straight off the bat. If you’re able to convert part, not a whole amount, part of your borrowings to these places, backed by our foreign exchange reserves that are over $400 billion, we would still have saved a substantial 6% of interest costs in whatever we’ve borrowed abroad.

That cost is going to straight away hit the fact that we have to pay less in interest going forward and it will help our future, the next few years, and perhaps the current year as well because you don’t have to refinance at Indian rates. You’ll refinance the Euro rate. The answer to many people. Is this going to cause, “Oh, my God, we’ll borrow in euros. They will come. Will they demand our country back?” The answer is we will always have enough money to pay. We will not get rid of $423 billion. And looking at one specific data point, this is how much we’ve already borrowed abroad. How much debt did the Indian government have? Roughly 77 lakh crores. Okay? If you add up everything.

But from the market, they were borrowed about 54 lakh crores. 54 lakh crores is where the government has borrowed from bonds in the market. This is the one they’re paying about six, seven, 8% add. But given the current situation, if they were to borrow abroad or if they’re looking at how much of the government that has actually borrowed abroad, 54 lakhs from the Indian markets, two lakh, 58,000 crores from non-Indian markets. That means the amount of our debt that is borrowed abroad is a very small quantity.

The second part of this equation is the fact that how much can we borrow abroad? I don’t think we’re asking for a huge amount. We’re talking, okay, listen overtime, can we build this to maybe say $100 billion? $100 billion, which will be seven lakh crores in five or 10 years. That would still be less than 10% of Indian government’s outstanding debt at that time. And I’m not talking about borrowing more money abroad, I’m talking about replacing the borrowing that we have to do from abroad or maybe borrowing a little more to make up for the fact that we need to have less borrowing in India.

India right now, the Indian government is going to repay 100,000 crores worth of borrowing. You don’t have to refinance that from the Indian, or Indian borrowing from Indian banks. You can do that from the Europeans or the Japanese who are happy to pay us, happy for us to pay a marginally positive interest rate because literally everything else is yielding a negative industry. We have enough of a trade with Europe and with Japan to be able to justify that, listen, part of this can be financed just by the fact that we trade so much with you, to be able to deal with the 10, 20, $25 billion borrowing from your shores.

The fact is also that this improves Indian fiscal situation if you think of the fact that the government is an entity that has a profit and loss statement, if you may. So government is always in a loss, that’s why it has to finance the deficit. How much is that? That difference is say five lakh crores. Now remember five lakh crores was the interest that we paid. So if you reduce the interest that you’re paying, you will automatically reduce the deficit. That means your losses will reduce. That means the government actually becomes stronger if it borrows abroad because it has to pay less in interest costs compared to borrowing it earlier.

The other benefit is that now banks, which are largely lending to the government, have the ability to say, “I can lend more to the general public. I have more money left behind because I’m not looking at having to fund the government,” because I’m always risk-averse. Right? As a bank, though banks haven’t recently been risk-averse. But assume that the bank-

Aditya: I get it.

Deepak: It will want to lend to the government if the government is looking for funds. But if the government says, “Listen, I’m done,” the government bond yields will fall to a point where they say, “Listen, I can’t lend to the government at 5% when somebody else is willing to borrow at eight or mine.” So it will try to borrow or lend to others at eight or nine. When the competition comes there, even those rates which are currently very high, the government will be borrowing at 6.6 but the normal man is bordering at 12. A company is borrowing at 10, the housing loan is still at 8.5. Those are not coming down. And one of the reasons they need to come down is because the cost of capital in India’s too high with respect to inflation.

Simply put, we can improve India’s financial health by borrowing abroad. There is appetite for foreigners to return money to us. In fact, right now, just as we speak, ECB has said they are going to do QE. They’re going to pump in $20 billion per month. By the way, $20 billion euros is one lakh, 50,000 crores.

Aditya: That’s big money.

Deepak: That is one third of India’s entire year’s borrowing program. Roughly four months of India’s borrowing program. They’re going to put that much in one month to buy Eurozone bonds in order to provide a quantitative easing to the Eurozone itself. And they won’t just buy Eurozone government bonds, they will buy anything. The joke is that the ECB will even buy toilet paper if a buyer and give cash in return. It doesn’t care. It really is in that kind of state. Whereas in India, we are having conversations about, oh, the RBI should not give these reserves back to the government. India has also done QE. India has done QE to the extent of nearly one lakh, 75,000 crores by buying dollars, literally dollars. We, our RBI is giving the US government a QE, all the European governments a QE by buying euros and dollars, but we refuse to give our own country a QE by buying Indian government bonds because people think it’s bad. I’ll come to that.

Aditya: That’s interesting, Deepak.

Deepak: But the point about this is this. If we tried, those people abroad would be quite happy to put their money. When EU is reducing rates by, it’s going to a negative 0.1% now. If €20 billion a month can translate into, let’s say €1 billion a month. Not even one. Let’s say €0.5 billion a month that can be allocated to India out of the entire list of QE that they’ve already done, plus what they’re going to do now. That’s $10 billion a year roughly that we could quite easily raise. I don’t think this is a bad thing and I’ll come to more reasons why, but this is my reason, it’s going to make things better for India. There is demand, there is appetite. I know you’re thinking of the negatives and we’ll address those negatives.

Aditya: Deepak, basically, you talked about the lower bond rate, and if not, we should go overboard. At least we should first refinance the existing debt. Let’s talk about the liquidity crisis that’s going on in the Indian and BFC and banking sector. If you look at the facts, government borrowing is about 80% of the domestic savings. Do you think it was a calibrated move by the government to ease the pressure on the domestic availability of the credit?

Deepak: This is interesting because what some of the economists have put across is, oh, you know what? Indian government is borrowing 3.3% and 2.2 by states, and some 4% or something else. Therefore, India’s gross financial saving, which is about 10% of GDP. 8% of GDP is borrower by the government. My answer to that is that’s not true.

Aditya: Okay.

Deepak: From the facts. I mean, I’m just looking. Forget the fact that you’ve used these various numbers in different ways. What we’re saying to the country is literally 2% of GDP available to the private sector is roughly what? Four lakh crores bank credit to the non-government bank credit. That means credit to anything that’s not the government has grown around, well, nine lakh crores. Can’t explain that, right? Because if non-government credit has grown by nine lakh crores in the last year, from say 79 to 88, it’s grown up about 12%. How can nine lakh crores be growing if only two lakh crores or four lakh crores are supposedly available? Now remember, we have a 200 lakh crores economy. 2% of that we said was available to lend to private. 2% of 200 lakh crores is four lakh crores. Four lakh crores should have been available, but Canada’s grown by seven or eight lakh crores. So how can credit grow by seven or eight lakh crores if only four lakh crores is available?

Deepak: Now I’m saying credit, meaning the word credit to non-government. Government itself has grown by five lakh crores. It is the amount the government is borrowing. The answer is these numbers make sense when somebody puts percentages on a wall, you see the actual data when bank rate has grown so much. You know that it’s not true. Bank rate can’t grow just because nobody’s borrowing. The bank doesn’t give itself money. I mean, of course it does give itself money. It gives you money in your account, and I transfer it to my account, and it’s just the same bank and all that stuff. But effectively, the credit is given to third party, which is not the government. It’s not bankers that are borrowing this money. It is roughly everybody in the country, and that itself is nine lakh crores. So nine and a half lakh crores.

Deepak: Agreed, there’re some PSUs are a part of it because PSUs form a significant part of the industrial economy. We can’t avoid that, but there is a significant amount of corporate demand and other demand as well. I’m talking of roughly more than half of … Well, 80 lakh crores or 78 lakh crores, or 80 lakh crores is roughly where the bank credit is in the country. It’s not necessarily being crowded, but what’s very important to understand is that credit is now becoming very select. I showed you this data right now-

Aditya: Yes.

Deepak:… where Bajaj Finance was able to borrow for three months at 5.54%.

Aditya: Which is very impressive.

Deepak: 5.4% is the overnight rate which the government can borrow at or banks can park at the RBI. 5.52% is what the government can borrow for three months. Bajaj Finance is able to borrow at 5.55% for three months. It’s so tiny. The difference between what Bajaj Finance, which is an NBFC, which should have been impacted. But no, it is able to borrow at 5.55% for three months, for the same three months. Muthoot Finance, we heard something about, oh, it’s closing some 400 branches in Kerala, the company’s in deep trouble. It borrowed 6.65%. Now that market players are very sharp. If companies are in bad shape, they will not lend to it. They will definitely not lend at 6.6%. You will find that companies that are so-called in trouble, let’s say so-called meaning Piramal, where you said, “Oh, these guys have exposure to so much housing.” See what Piramal borrow at. It borrows at 8.5% plus even today.

Deepak: Some companies don’t get access to financial value. You won’t even see their names in these lists. So you won’t see the names right now, for instance, of many companies that are simply shut out of the commercial paper market or the bond market. That’s fine, that’s a natural consequence. But I don’t think these companies, the rest of the companies have been crowded out by government borrowing. The easing of the borrowing profile will come because the government wants to reduce its interest costs, but not because the government wants to say, “Oh, listen, I’ll give you more space.” The government continue to borrow and be a significant borrower in the local markets because right now the government actually needs more funds. Because in a time of a crisis when people are not paying enough taxes, the government actually needs to spend to kick start the economy.

Deepak: Some part of this will have to come from enhanced borrowing. The enhanced borrowing can be from abroad. It won’t affect us so much because we’ll be paying a lower interest cost on them. Right? I’ll give an example. If my interest costs on say 100,000 crores was 6,000 crores, and now I can take the 100,000 crores, interest of $6,000 crores, I’ll pay $1,000 crores. I’ve saved 5,000 crores, right? What if instead of 100,000 crores, I borrowed 150,000 crores? My interest cost would we still say 1,500 crores. My interest cost on a 50% higher borrowing is spill 4,500 crores less than my current borrowing if I had to do it in India.

Aditya: Exactly, because of the lower coupon rate.

Deepak: Because of the lower coupon rate. So I could borrow more from abroad and my fiscal situation will likely improve because I will have to pay less in interest costs. I believe this is a good thing for them to do. They might eventually not actually crowd out the Indian credit registration, but I don’t think the situation’s getting crowded out. It’s not like people are willing to give the money to the government instead of giving it to private. Give you an example. Yesterday, 1.5 lakh crores were parked by the banks in the RBI at 5.4% interest. Why? Because they simply don’t want to lend it out. They’re scared. They’re scared because the economy is in trouble. They don’t feel that there’s anything that’s great in credit out there. They’re not even buying the government bonds. They’re so scared that otherwise they would’ve bought the 10 year bonds. They’re not. They’re not getting enough confidence to buy.

Deepak: To generate that confidence, the government will have to come out and say, “Spend. Don’t worry, we’ll kick start the economy.” Only then will banks get confidence enough to say, “Okay, things are going to move, things are going to get better from here.” The RBI might need to come out and say, “We’ll do a QE.” That also is something that’s acceptable at this point because if the RBI were to say, “We’ll reduce rates strongly, we’ll go really strongly after the economy,” that also provides confidence.

Deepak: Crowding out is not happening. There is enough capital to lend. It’s just that right now there’s so much fear in the market that you processes that the government say, “Listen, we will borrow from abroad, we will reduce bond yields. We’ll allow you to lend and we will spend more in the economy itself.” That crowding out part of this entire portion is probably less than 10% of the impact.

Aditya: That’s interesting. Let’s discuss couple of potential downsides of borrowing abroad. There are three ex-RBI governors who have given statements that the government shouldn’t do that, it shouldn’t borrow abroad. So Bimal Jalan, Raghuram Rajan and C. Rangarajan. All three of them are saying that we shouldn’t do it. And I see where it is coming from. If you remember the 1991 crisis, at that time, our external debt to GDP ratio was pretty high at 29% and we had more of short-term debt component in our external debt. Then we had issues in getting that short-term debt rolled over, which eventually forced us to draw down on our reserves, hence the liquidity crisis.

Aditya: But today the situation is completely different. Today the external debt to GDP ratio is about 19%, which is 10% lower than the 1991 levels. And the government’s external debt to GDP ratio is just 3.8%, which according to even our finance minister is the lowest among the developing countries in the world. So it shouldn’t be a problem. The financial health is okay compared to 1991, so that shouldn’t be a concern. But my question to you, do you believe that even if we do borrow, we should go only for long-term bonds? And should there be a ceiling? Say government can’t borrow more than 1% of the GDP.

Deepak: 1% of GDP is about two lakh crores. I think it’s too small. I think in any given year you can say don’t borrow more than 1% of GDP. That’s fine. I don’t think India will see appetite for more than €10 billion at this point, which is about 70, 75,000 crores. I don’t think any more appetite exists right now because everybody wants to wait and watch, and I think this is a good start. If there is appetite, of course, we can look at more. I think go and give more and borrow more, especially if they’re going to give it to you at negative rates. Just go and borrow as much as you can, but up to say 10% of the total debt, which is right now about 55 to 5.8 lakh crores, so 580,000 crores. That would be roughly 3% of GDP.

Deepak: Now if you borrowed 580,000 crores from abroad, you don’t need to borrow from India at all almost, if you’re willing to retain the same kind of fiscal deficit. But let’s say you expand the fiscal deficit a little more to be able to account for some spending, you’ll literally steamroll down any further borrowing in India. Borrow mostly from abroad this year and allow this money to kick start the economy. In that context you might say we could do a mix of short-term and long-term bonds.

Aditya: Okay.

Deepak: I would prefer long-term bonds, but long-term bonds add another layer of a thought process which says if I too many long-term bonds, my overall long-term exposure abroad might increase. So I might say I lose some five year bonds, I lose some 10 year bond. It depends on the appetite. I don’t think anybody’s going to go around looking for one year bonds from India or three month bonds from India right now abroad.

Aditya: The reason why I ask that question is because the finance minister said that for this fiscal year, they are planning just $10 billion of bonds. Suppose the government goes ahead with 10 years of sovereign bond worth 10 billion, who will stop it from going overboard and issuing more and more bonds? Since the repayment is long-term, say 10 years, 15 years, this government may not be in power when the time for repayment comes. A similar situation might happen like what is happening right now, the current government is blaming the previous government for the NPMs. So it’s like you keep on borrowing long-term and then after 10, 15 years, you never know which government is in power. And that government, if it fails to maintain the fiscal deficit, it will find it really difficult to repay that debt.

Deepak: This is the problem is that what if another government is in power, right?

Aditya: Yes.

Deepak: But what are the same government is in power? Your problem is this, you’re creating debt. It could be a poisoning the well phenomenon. The idea is that poisoning the well is like when people used to attack another country, these two or another place which had a fort. The idea was to throw poisoned frogs-

Aditya: Exactly, true.

Deepak:… or poisoned rags with darts and arrows so that some of them could fall inside a well and that well would then get poisoned. Then nobody would have any source of water and everybody would die. Poisoning the well when you leave a place is to say that the next person that comes here will not enjoy that place because that well will be poisoned. They won’t be able to drink the water. If you poison a well, you can’t come back to the well. So if you make the situation so bad for the next guy, it almost ensures that you can’t come back. But let me put another thing to you. I think we should stop thinking of our government as people who hate us or are like our children, where we would say that, listen, if I give you one biscuit, you’ll have the whole packet.

Aditya: Exactly. The question is of discipline.

Deepak: If we can’t trust our government to be disciplined in the long-term, then we can’t trust ourselves. That’s what we’re really saying. By saying that I can’t trust you so I won’t let you move. That is almost like saying, I’ll chain you and you have to behave only this way, and this way is not working obviously. This is an actual solution, right? This is an actual solution that could work. But to not give it to the government simply because we believe that it can go overboard with it, I think that’s a bad idea. We should have reasons. We can put limits on it and even create … I mean, as I said, 10 times the $10 billion number that we’re talking. What is still not a problem? It would still be less than 10% of India’s debt overall, in the next few years.

Deepak: I don’t think we need $100 billion today, unless there’s a massive crisis. If there is appetite, we could do 20 billion. Maybe we could do 30 billion. I’m happy to do it right now simply because the Europeans are crazy. They’re giving negative interest rates. Why aren’t we taking advantage of this? If you told me that somebody was giving me a negative interest rate, I would absolutely mortgage everything and borrow because of anything else. Because I simply believe that this country has enough growth for me, for myself to be able to return a negative industry concept. And I could do it fairly easily.

Deepak: So the fact is if we go overboard, we can go completely nuts. But have we gone overboard on anything in the last 20 years? Fiscally, every single government has come in and tried to reduce the fiscal deficit. Whatever they’ve done, they’ve tried to address crisis, but they’ve kept themselves fiscally responsible.

Aditya: That’s true.

Deepak: So why would we say that suddenly, all of a sudden we will get some complete madness going on? I agree there are some problems, but I don’t think the fiscal deficit situation in such a shape that we should say we will never be able to return this money back.

Aditya: But there are couple of other risks. For example, the currency risk. And suppose the government borrows from abroad and the interest rate is cheaper, but what about the future rupee appreciation or depreciation against Euro or dollar? There’re only two possibilities, right? Either the rupee will appreciate or depreciate. So suppose we keep boring, our Forex reserves go up. As a result, rupee appreciates. Then our exports will be hit. However, suppose our inflation remains above the inflation in say Europe and as a result, the rupee depreciates. Then it’ll be worse because ultimately we’ll have to pay more rupees to repay our external debt. So both ways we might have to pay heavily.

Deepak: This is a fear that I think the point is if you borrow $100 at 70 rupees, we get 7,000.

Aditya: Yes.

Deepak: We may get it at 0.45%, but three years later the rupee’s at 100 and then we are returned the $100, and we have returned 10,000 rupees.

Aditya: Yes, yes.

Deepak: Let me ask you this. Okay? Rupee at 110 years or even in five years, okay? How much inflation is that? 70 becomes 1,000, which is roughly 40% inflation, let say.

Aditya: Yeah, around that.

Deepak: In five years or six years, let’s say. In six years, if you’ve done 40%, it’s about 6% year. 6% is the difference between now, our borrowing rate and the borrowing rate in Euro. Essentially, we have to have a 6% depreciation rate per year in order for us to be exactly equal to borrowing locally.

Aditya: And that’s the worst case scenario.

Deepak: Worst cast scenario. Okay. How much has the rupee depreciation been in the past 20 years? Average, 4%. Last few years, even with the current rates of the currency, 3.8%. Going forward I would like to say that the difference between Indian inflation and the EU inflation or the Japanese inflation is going to be roughly the difference between our currency rates. That means the depreciation will be the difference of the two. Inflation in the Eurozone is probably zero, let us see, roughly on average. We are about roughly 3% right now. We might go to three and a half, four. So roughly 4% depreciation in our currency is the maximum I can imagine because we are controlling inflation, they are trying to create inflation. So the gap can only narrow. At 4% inflation differential between the two countries, we would add max depreciate 4%.

Deepak: If the differential of interest rates between the two countries is six, 6.5%, I think India will actually benefit hugely by over 2% a year. But this is in the worst case scenario. Look at the last five years or last four years, how much has the Euro appreciation been in comparison with the Indian rupee? The answer is the rupee has actually appreciated substantially also compared to the Euro in many parts of the last five years, and it’s quite likely that the rupee’s stability will increase because more and more dollars coming, our fiscal situation gets better. This attracts more foreigners to invest. Remember, what they invest in Indian debt, which is two lakh, 50,000 crores, is less than one 10th what they have in Indian equity markets, which is 27 to 37 lakh crores. That is the differential.

Deepak: So if you make India’s situation better, more equity investment coming, equity comes in 10 times what we’ve seen in the last few of these things. So in fact, this year itself again. We were looking at 2018, so 19 January to now. FIIs, though they’ve taken out money for investors in the equity markets have taken out a substantial amount of money in the last two or three months, but there’s still positive 44,000 crores in equity. How much have they invested in debt? 34,000 crores.

Aditya: Amazing.

Deepak: Just in the last four months, 28,000 crores has been invested purely in Indian government debt. They’ve put in so much money into Indian debt despite all the wars, the fears, the slowdown. They put 12,000 crores in the last 45 days alone. So if this is the kind of money that is chasing the Indian government debt in rupees, will not some of it chase on a relative basis that much of Indian debt in Euro abroad? So I don’t think this is a problem because when Indian government is able to borrow from abroad, that Euro will come to India, that Euro will depreciate against the rupee marginally. The reserve bank will build more Euro reserves and that will be usable to pay at a future date for other kind of debt.

Deepak: Now what we should be actually doing in a way is using these Euro, the reserves that come out of this for the RBI. Then will become extremely skewed towards the amount of euros it holds. It already holds three times the amount of US dollars and euros versus how much it holds of rupees bonds. They can then issue more currency in rupee bonds to balance that out, although this will be a QE by the RBI, it will also be a benefit for everybody else in the country. The RBI will be the one absorbing a lot of the rupee bond interest as well. So in the crowding out example, then it’ll leave less required for banks to lend to the government and that will be an easy transition I feel.

Aditya: My last question to you is that, is there any other way of doing this, borrow money and lower interest rates, and reduce the crowding out effect? Why can’t we simply expand the limits on foreign investors investing in India’s debt market? That way more foreign money will also reduce crowding out effect and possibly reduce interest rates. And most importantly government can repay the loan in Indian rupee itself.

Deepak: I think the last part, which is government can repay the loan in Indian rupee, is not as relevant as we get more and more international. Because as we get internationalized, I think the rupee will get internationalized. We’ll eventually have to convert. I hope we do. I hope there’s a crisis of the kind of magnitude that India, A, has to borrow abroad and B, has to free the rupee completely so that we can not have to worry about actually paying back in rupees versus paying back in another currency just because people are able accept it. But leaving that aside, if we expanded the limits of foreign investors, can they come? the answer is are they buying up to their limits today? Answer is no. They’ve got one lakh, 78,000 crores of rupee debt, as I said, government debt.

Deepak: They can buy another 55,000 worth, so they’ve not reached their limits. And remember, they can only buy three year plus and some cases one year plus majority debt. So they can’t buy short-term debt, they can’t buy T bills. This affords India the ability to say, “Listen, you have enough room, you can still buy more.” They are continuing to buy more. Like I said, 33,000 crores this year. So expanding limits on foreign investors in India’s debt market is simply not going to change things. India tried masala bonds with various corporates. The government hasn’t done masala bonds. Masala bonds are essentially rupee debt issued aborad.

Aditya: Yes.

Deepak: The issue with that is we have internationalized the currency. We’ve tried to intellectualize the debt. I think we should free our currency properly with full capital account convertibility. Only then will masala bonds be acceptable. So forget that point. Now what’s the only choice? You’re refusing to free up your currency, you’re refusing to allow free movement of currency from India outside or from outside inside. Remember, we have a lot of regulations. If you bring $1 from foreign shores to an Indian rupee account, there are hundreds and thousands of questions. RBI will ask you to file this and that. And if God forbid, you’re able to actually get investment from a foreign investor, you have to do the rounds of RBI.

Deepak: There’s something called an FCGPR. They will put you through hell because you have to get a valuation now from a merchant banker to be able to support the investment. And then you have to be able to justify who this came from, do KYC or Swift, not any other channel, or Swift, which is a banking transaction channel. You can’t get the money and say Amazon dollars and say, use this money to buy anything. No, no. It has to come through the banking channel. Why do we have all these restrictions? Because we refuse to accept that people abroad, we make it so difficult for them to invest in India and yet they do it.

Deepak: The fact is they’re doing it despite all of these restrictions while other countries have actually opened up and said, “We don’t want to ask so many questions. Just come. We lay out the red carpet for you guys.” We should do that. If we borrowed in foreign currency, perhaps there will be a feeling that, okay, listen, we should open it up now. We’re borrowing from these guys. We need to allow more of them to come in here, more of them to invest in India and not necessarily demand the money back. This invest. So right now it’s such a difficult mechanism for a small business to raise money from abroad, tomorrow shouldn’t be. It should be much easier for them.

Deepak: So I believe that the borrowing process that we’re doing should necessarily be internationalized. Not just for the fiscal benefit it gives us, not just for the fact that we don’t need to hedge, it’ll reduce the currency depreciation over the longer term because of relative inflation differences, not just because costs will be substantially lower to do that and it will actually result in crowding out perhaps of Indian borrowers, but also because it internationalizes India. We think we are very big internationally, but we’re not. The total amount of trading volume of Indian stock market is a half an hour of trading of Apple stock. Half an hour of one stock in the New York Stock Exchange. It’s that small.

Deepak: There is a significant, at least small India for the rest of the world, and a significantly large India in our own thoughts. If you want to do something, you have to go there and you have to borrow from people. You have to lend to people and you have to participate. If you’re going to go outside and say, No, no. You have to participate only rupee,” people will be like, “Are you crazy? Why would I do this?” Now the answer to typically most of these things is they should be able to borrow in rupee if they like India so much. Don’t like India so much. Every other country is borrowing in Euro. Moscow is borrowing in Euro, Indonesia is borrowing in Euro.

Deepak: Now If you were to create a basket of these currencies, you want to say, okay, I want to buy the debt off all emerging markets. So I’ll buy Russia and Brazil and Indonesia and Korea. India? No, no. But India we can’t borrow in Euro because we are to borrow only in Indian rupee. Be like, “Okay. Get India all this stupid basket, let’s get everybody else,” because I can do Euro borrowing of all of the others. I can’t do India. So India is not a part of any international debt basket simply because we don’t borrow, we don’t have enough volume for them to lend to. We should be out there. If we’re planning that India needs an international face in the long-term, let’s go there, embrace their currency just as we believe they should embrace ours in terms of investing.

Deepak:I think that in the longer term will help us. This is the softer part of the whole exercise, but we’ve got the hard parts, right. Right? We’ve got the fiscal benefit, we’ve got the fact that we have lower inflation, we’ve got the fact that people want to give countries loans, not just India, but everybody else loans at sub 0%. We’re just asking for 0% and that’s a significant plus nowadays. We should take advantage of that. Apart from that, this is soft aspect of simply saying, listen, we’ll come and participate in currencies that everybody else is participating in. Tomorrow, you’ll want to participate in ours as well when we get internationalized.

Deepak: That’s the sum total I think of all the reasons of putting together. I believe this is a solid time for India to do this, despite all of these economists telling us and X governors telling us this is a bad area. And I think we should have independently evaluated them and I’m giving you data facts, figures. I don’t think that we should be fearful to a point where we feel that India will become like a George Soros kicking ball, where we know he’ll come in and shot $1 billion, $5 billion, $10 billion. Listen, India is 400 billion. It’s not going to be easy to bring this down by just doing a 10 billion borrowing abroad.

Deepak: We could easily substitute it if we want wanted, but I don’t think it will come to that because we aren’t as fiscally weak today as many of the European countries are. And the Euro, nobody’s shorting it like nobody’s business simply because they’re weak. There have a very strong central bank that’s saying I will do whatever it takes to push my economy back. We should have a similar kind of confidence in our economy and then move this forward. If it takes borrowing from abroad to do it, let’s do it. It’s good. It works for us.

Aditya: That was amazing, Deepak. It was an enlightening discussion. Thanks a lot for doing that, and thank you for taking our time and doing this podcast.

Deepak: Always a pleasure, Aditya, and lovely to have all of you listen. I hope you’re still here and not dosing off asleep, going through all of these things. We have more for you in our Capitalmind podcasts. Do let us know at @deepakshenoy and @AstuteAditya on Twitter. Got to, that’s where you’ll find us. It’s a nice little app, works beautifully on the phone as well. Listen to it when you’re driving, tell us what you think. We’d love to hear from you. Thank you.



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