Updated: April 5, 2017 6:08:59 pm
When global stocks plunged on Monday after a sell-off in Chinese shares, investors were asking whether the rout in equities, commodities and currencies would be like the last Asian currency crisis in 1997.
India weathered that storm, but after Atal Bihari Vajpayee’s government conducted nuclear tests on May 11 and 13, 1998, economic sanctions by developed countries followed. Many donors cut off bilateral assistance, the US Export Import Bank abruptly stopped financing projects in India, and lending by the World Bank and other multilateral agencies froze. Exports were also on the decline then. Global credit rating agency Moody’s downgraded India, which had an impact on not just foreign portfolio flows, but also on commercial borrowings and capital flows.
Yashwant Sinha, who was Finance Minister, has recounted how Vajpayee called him to his residence a few days before the tests, and met him not in the living room, but in a bedroom, to quietly sound him out. The PM told him to prepare to handle the economic fallout, Sinha has written. Foreign exchange reserves then aggregated $ 26 billion, adequate to cover imports for six months. But soon as the reserves started to fall, given the urgent need to boost confidence, the government and RBI began exploring options.
At the spring meeting of the World Bank and IMF in Washington, and later at meetings in New York and London, investment bankers pitched to the Minister the idea of going in for a sovereign bond, or direct borrowings by the government from global capital markets. On his return, Sinha consulted officials in the Finance Ministry, who told him that rather than going in for a sovereign bond issue, the government should mandate State Bank of India to borrow as proxy. They may have been guided in their thinking by the fact that in the past too (like in 1991), it was SBI that had raised funds from abroad through India Development Bonds.
RBI Governor Bimal Jalan was told to work out the details. Within two weeks of the Resurgent India Bonds or RIB (a name suggested by Home Minister L K Advani) being launched, SBI raised $ 4.2 billion from NRIs and Overseas Corporate Bodies by offering an attractive rate of 7.75% in US dollars — which was 2.25% over the benchmark six-month Libor, boosting forex reserves to $ 30 billion. That offered comfort from a balance of payments perspective. The redemption of bonds went smoothly, with many investors putting back the money into deposits in India.
Two years later, in 2000, when oil prices surged and forex reserves dropped from $ 38 billion in April 2000 to $ 35 billion that November, the government and RBI again discussed options. This time, some officials in the Finance Ministry made a strong case for a sovereign bond offering, citing lower costs compared to a borrowing by SBI. But Governor Jalan managed to prevail over the Ministry and got SBI to do another bond offering, the India Millennium Deposit or IMD, to raise money from overseas investors. These borrowings were costly at 8.50%, but a killing was made by NRI investors, and foreign banks who marketed the bonds aggressively, especially with the protection offered to them on exchange rate risks. Little wonder that the SBI raised $ 5.5 billion this time.
The move to float these bonds was criticised considering the all-in cost of 10% for the borrowings. The issuer, SBI, had to bear only 1% of the depreciation of the currency with the government agreeing to bear the risk. Where it was flawed was in the use of the proceeds of a bond issue abroad in foreign currency to finance infrastructure projects in India, which generate revenues in rupees. Bankers in Mumbai recount stories of how a top corporate managed to park a substantial amount of its funds through willing foreign banks in the IMD to make windfall gains.
As in the case of the RIB, redemption of these bonds too turned out to be a smooth affair. Much before that, prudential ratios for external debt, such as the level of import cover, had risen to over eight months, while short-term debt and total foreign debt as a percentage of GDP was well within limits.
When the Indian currency came under attack in July and August of 2013 with the worsening of the twin deficits — current account deficit and fiscal deficit — there was no recourse to any bond offering. The RBI, with a new Governor at the helm, decided to provide a window for banks to raise Foreign Currency Non Resident or FCNR deposits, along with a concessional swap facility, which helped raise $ 34 billion. That bolstered the currency, and in the months that followed, the central bank started building its reserves.
It does appear that only during a crisis are such attempts at building a defence recognised. When capital flows were robust and the going was good between 2005 and 2009, a major debate was on the use of foreign exchange reserves for infrastructure and other projects. A defiant RBI Governor won that argument then.
India is one of the few countries that still hasn’t borrowed in the global markets through bond offerings. Even China has issued sovereign bonds. Sometimes, being an outlier may not be bad after all.
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