India will do better by accepting the fact that the worst of this Covid-19 pandemic is still ahead of us. We are at a critical stage of our response to the growing crisis around the world. Any window of funds, like a capital market abroad that may snap up Indian corona bonds issued in dollars should not be left out.
In the last few years, financial inflows have been healthy. Our central bank has more than half a trillion dollars piled up. In an effort to reduce rupee volatility under a greenback in-surge, it has recently mopped up billions. The central bank would be required to sell dollars to support the rupee, if the financial inflows deter its value.
Yields on Indian paper are said to be above pre-Covid levels. India’s sovereign debt has been slotted in the lowest bracket of investment grade by Triumvirate of Credit Rating Agencies. Some of the factors which have increased the risks include, economic contraction, fiscal expansion and a borrowing binge at home. Safe bonds that pay well are likely to attract investors, with demand for low-risk paper increasing and yields going below zero.
India started the current year with an external debt of around $564 billion, although the government just owed $110 billion of it. It was more about corporate loans and non-resident deposits that made the bulk. New Delhi will be required to price these bonds appropriately, as its payback record has been vulnerable. Our exports have been weak, while the capital inflows are deemed unreliable. If the rupee slides further, the plan could turn out costlier than negotiated for.
If trade barriers or capital controls are imposed, a reversal of our economy’s integration with the rest of the world would turn forecasts of our external balances vague. However, the country can safely borrow in dollars at this juncture, and we need to keep that option open in the larger context.