While governments in emerging markets have spent decades developing domestic bond markets, the finance ministry of the world’s second-most populous nation is turning to foreign-currency debt. Strangely, that might not be a bad idea.
In a speech accompanying India’s latest budget, released Friday, Finance Minister Nirmala Sitharaman said the nation would issue foreign-currency bonds. Local media reported borrowing of about $10 billion could begin in the second half of the year. The Indian government currently has no outstanding dollar bonds.
The case seems unusual: Governments tend to borrow in foreign currencies because they have to, not because they want to. That phenomenon has been dubbed the “original sin” of emerging markets.
So why would India, with a thriving rupee bond market, want the risk?
The answer lies with the country’s corporations, which have been turning to the dollar bond market in increasing numbers. For those with significant international business, that makes sense. Yields on U.S. debt are far lower, and for firms with reliable dollar income, repayment doesn’t hinge on the exchange rate.
But in much of the world, corporate bonds are priced in relation to the government yield curve. Without any sovereign dollar bonds, it’s harder for investors in Indian corporate debt to do that.
Research published in The Review of Financial Studies by economists Robert F. Dittmar and Kathy Yuan suggests sovereign bond issuance improves the ability of corporations in the same country to issue in international markets, allowing investors to better price private-sector debt and aiding liquidity. That reduces yields and corporate bid-ask spreads, according to the authors.
Few countries are in a better position to see whether that’s true than India, whose government has negligible foreign-currency debts.
At just 6% of gross national income in 2017, India’s stock of public and publicly guaranteed external debt was the 10th lowest of the 116 developing countries that provided data to the World Bank.
India’s rupee-denominated general government debt runs to about 67% of GDP, above the average of roughly 48% for emerging markets, but below Brazil’s 87%.
The total size of the Indian dollar-bond market issued overseas runs to about $85 billion, a 10th of China’s figure, and less even than that of Indonesia, an economy less than half the size of India’s.
The picture would change, of course, if India decided to head down the well-worn path to binge on foreign-currency debt as other developing countries have in the past.
But at such limited amounts, and starting from such a strong position, borrowing a few billion greenbacks here and there isn’t likely to do any damage to India, and might even offer a helping hand to its corporations as they step out into the world.
Write to Mike Bird at Mike.Bird@wsj.com
https://www.wsj.com/articles/indias-bond-market-could-benefit-from-some-sin-11562659174
2019-07-09 08:02:00Z
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