Sovereign dollar bonds

Many of you might have noticed that the Indian government announced a plan to borrow in dollars in international capital markets. It will be India’s first foreign currency sovereign borrowing from capital markets.

In one short sentence, it is ill-advised. If you thought that the issue of ‘Masala’ bonds (rupee bonds issued for foreigners to subscribe) were safer, that is wrong too. Happy to elucidate. Have done so here.

I wrote about it in my column on the budget published the day after the budget was presented:

One headline that grabbed attention pertains to the government announcing its intention of issuing sovereign debt in foreign currencies. Apparently, India thought of it in 2013 but did not go ahead as the macro fundamentals were deemed dodgy then. But, probably the best time to borrow would be when the domestic currency is undervalued. The Indian rupee in the second half of 2013 was close to being undervalued. Right now, India’s macro fundamentals are not weak, although big question marks remain over the economy’s growth rate, its sustainability and vulnerability to a global stock market correction. In other words, the risk is tilted towards further weakness of the Indian rupee. In 2013, it was tilted towards its strengthening after a hefty correction.

On the other hand, the timing is opportune in another sense because global central banks are back to considering further crazy monetary easing moves. To that extent, raising foreign currency borrowing now is a case of good timing. Another upside is that the government would not be crowding out domestic savings, which have declined in recent years and show no signs of reviving. That is a good thing. [Link]

The above two paragraphs only focused on the micro issue of timing the bond issuance in foreign currency. But, the argument in favour of issuing foreign currency denominated bonds in terms of it not crowding out domestic borrowers is not entirely correct, I admit, because Dr. Y.V. Reddy had pointed out lucidly as to why it is no help to domestic non-sovereign (private sector borrowers).

The argument is this: if India’s safe current account deficit is 2% of GDP and if Government of India borrows from foreigners (it is part financing of the CAD), then the amount available for other domestic borrowers in foreign currency is going to be reduced by that amount. The ‘ceiling’ is unofficially set by the ‘safe’ current account deficit for the country.

Then, on July 9, I wrote more extensively for MINT on the dangers of the Indian government borrowing in foreign currency. [Link]. It might open the door, together with other measures announced in the budget, for greater financialisation of the economy at a time, when its macro-economic health and performance are brittle.

Besides Dr. Y.V. Reddy’s piece, one of the best comments on this subject came from Sanjaya Baru. It is well worth a read.

In this piece, Shankkar Aiyar suggests alternatives to raising dollar resources through sale of sovereign bonds:

Yes, India must raise additional resources and in dollars to finance the aspiration for high growth. Why not raise dollar resources by listing LIC? Why not aggregate surplus land with government into a land bank and call for bids? Why not transfer government ownership of public sector banks and enterprises into an exchange-traded sovereign fund?

Yuan prospects

Read this in John Authers’ missive:

On the yuan, I found this point from Michael Howell of CrossBorder Capital very interesting:

The China currency is getting traction and could displace the USD in Asia (China’s stated aim). What is not well understood is that China still has an immature financial system which forces it to accumulate USD (from trade which is USD denominated) and manage them centrally via the State. Domestic institutions, unlike in the West, have predominantly Yuan liabilities and so cannot afford to take this forex risk. China initially used forex reserves to buy US Treasuries, but now invests via FDI, e.g. Belt and Road. This external infrastructure programme will help to establish the wider use of the Yuan across Asia and get China off the US dollar hook. Do not underestimate the value of this seigniorage for growth.

He could even back it up with an anecdote:

I attended the LSE launch of George’s book. There I met an ex-Central Bank Governor from Central Asia who shared my scepticism about George’s Yuan point. “I will show you,” she said and pulling out her iPhone she shared a photo of her at a formal signing ceremony for a several billion Yuan swap line with the Chinese Finance Minister. Proof she claimed that this underlying use of the Yuan is already the reality across Asia.  [Link]

Let me now do what my good friend Amol Agrawal of ‘Mostly Economics’ usually does.


Amusing and priceless

This is the amusing stuff:

“Juncker vows to turn euro into reserve currency to rival US dollar”

He must pay close attention at least the topline results of the PEW Survey I had blogged on earlier.

A quick recap:

Underneath Mr. Macron’s pro-European rhetoric, the French people are only closely behind Italy in their distaste for the European project. Politicians do not command much trust. The public is confused and worried on immigration. Distrust of media is rather high as it is the case with financial institutions.

(2) This is priceless stuff:

“Aung San Suu Kyi defends verdict against Reuters journalists”

This underscores the ‘free lunch’ of being a ‘Liberal’ outside the government and how difficult it is to govern as a ‘Liberal’. Indeed, there is an inherent contradiction being in government and being Liberal.

Two years of Patel, the RBI Governor

My friend Gulzar Natarajan drew my attention to an article by Andy Mukherjee and an Edit in MINT on the second anniversary of Dr. Urjit Patel as the Governor of the Reserve Bank of India. I had read the Mint Edit myself.

Andy’s piece is an interesting one. I do not recall readily if he had been critical of the RBI Governor’s role in demonetisation and in the ‘Reverse Bank of India’ moniker that was slapped on the institution in the initial weeks and months of the demonetisation exercise. My vague recollection is that he was. But, in any case, this amounts to a retraction of such criticisms, if he had made them earlier.

More substantively, the Governor has breathed some credibility into the Monetary Policy Committee (MPC) and the Non-Performing Asset (NPA) resolution mechanism. Arguably, he had to take tougher decisions on these than his predecessor. During RR’s period, the NPA problem was beginning to come to light. Very few had a clear idea of either the dimensions or the complexity of the problem. Of course, RR took the bold call to order Asset Quality Reviews (AQR) which allowed both of the above to be revealed. That was very important at that time. Now, Dr. Patel has to navigate the political economy of resolution which is perhaps a stiffer challenge than the political economy of disclosure. May be, I am just splitting hairs, here.

Also, the other challenge that Dr. Patel is facing is the Fed tightening and an ‘election-mode’ government both of which, collectively, bring pressure on the fiscal, current account balances and consequently on the Rupee. Popular commentary on the Rupee weakness is unhelpful to the Governor.  It bleats about the Rupee weakness as though it is a problem in and of itself. It is not. The problem is with the underlying low productivity of the economy – especially in its farm and factory sectors. On top of them, fiscal policy has quietly but steadily slipped at a general government level.

Collectively, the farm loan waivers announced by State governments – BJP and Congress-Ruled – have been more than two and half times the farm loan waiver that the UPA-1 government had announced in 2007-08. The general government fiscal deficit for 2017-18 is 7.0% as per IMF estimates. The two rate increases in June and August announced by the RBI are very important and may prove to be very important and useful in ensuring monetary and exchange rate stability.

As for macroeconomic stability, it is in the hands of the Government and not the RBI. Raghuram Rajan was right to stress its importance going into an election, in his Bloomberg interview at Jackson Hole recently.

In short, yes, the Governor has quietly re-established his personal credibility and that of the institution he heads and that can only be good news for the country.

[Post-script: Tamal Bandyopadhyay adds his two cents worth of tribute to Urjit Patel while Amol Agrawal provides the much-needed alternative perspective]

EM Currency Crises

As the currency crises in Argentina and in Turkey resume, readers should read this paper by BIS, especially Section 5 (pages 24-29). Raghuram Rajan says, in this interview, that Indian rupee weakness is not yet a serious concern. I agree there. BTW, he also notes, somewhat mildly, that globally, leverage and higher asset prices caused the 2008 crisis and that they are both high now. Again, I agree.

Two weeks ago, I had written on the fundamentals behind Indian rupee weakness. They do point to a weaker and not a stronger currency. As long as the weakness is gradual and orderly, that is what the fundamentals dictate. No point in complaining about the mirror for the quality of its reflection. Get the reality right.

It is good to see MINT encouraging a student of economics from the Madras Christian College to write, by publishing his article. It is reasonably well written. The last paragraph stumped me, however. Also, the blurb chosen for the article is not the right one. That contradicts the message of the article as did the last paragraph.

Good story on why Australia banned Huawei from its 5G networks.

Ashok Gulati rightly takes the Commission on Agricultural Costs and Prices to task for tailoring its recommendations to suit the governing political party’s political priorities.

What to do to avoid a rupee ‘crash’?

A friend to whom I had sent this piece of mine on Rupee risks asked me as to what steps might help avoid a ‘crash’ in the Rupee. Such questions make us think if there is anything at all that governments and central banks can do to avoid such an outcome or it might be that the train had left the station? The truth could be a bit of both. The bulk of the conditions that presage a fairly large depreciation might already be in place but policymakers should, nonetheless, do a few things (if they are still possible) to mitigate the effect; to cushion the effects or to even moderate the depreciation. So, here goes:

(1) Very important to project confidence and calmness and avoid looking panicked. I am starting with this because, in these situations, that is arguably the most important aspect.

(2) Also, panic will force the government to take measures that would aggravate the situation. RBI’s decisions to increase the limits on foreign portfolio investors for government and corporate bonds and the relaxation on eligible external debt borrowers from India are examples of measaures that could be considered ‘panicky’.

(3) Avoid measures that would aggravate the fiscal deficit. For example, these would be reducing excise duties on petrol and diesel and not allowing oil companies to pass on prices. Both are wrong. One, the Government of India (GoI) needs the revenues badly. Two, if GoI has to keep the import bill under check, it has to pass on the higher prices and curtail demand growth.

(4) RBI should neither cut rates nor raise rates unless its inflation mandate is materially threatened. It must see through the oil price related inflation impact. Unless second round effects are important, it should ignore first order effects

(5) The Government should refrain from public advice or instruction to RBI on interest rates. It is lose-lose-lose. Loss for the Government – meddling image; loss for RBI – even its independent decision would be labelled ‘capitulation’ if it coincides with Government’s wishes; Loss for the economy because these two would drive rupee down.

(6) If the GoI can come up with some schemes to consolidate or reform PSU banks’ governance – even if they cannot privatise now – it would be a positive

(7) Any forward movement (or, a successful bidder announcement) on AIR INDIA privatisation will be a positive

(8) I do not know the details of the NSE law suit against SGX (Singapore Stock Exchange) but it is bad optics

(9) Similarly, SEBI diktat banning all Foreign Portfolio Investors (FPI) from participating in Indian capital markets if they were managed by people of Indian origin from buying into Indian market seems rather too drastic and excessive. It will curtail inflows when these are the ones who will have more patience, tolerance given their better understanding of India’s ground reality. If their goal is to avoid round-tripping of Indian money, they can impose more KYC requirements (even though they may be already quite comprehensive and tight) but banning FPI that are even remotely connected to Indians or people of Indian origin (even if they are now foreign nationals) for this reason is too drastic. They aggravate the situation with respect to capital inflows and increases pressure on the Rupee.

(10) I do not know the current situation but if they can completely remove or lift all restrictions on agricultural exports, it will be a good signal. But, may be, very few restrictions remain but they should let farmers cash in on export markets or domestic markets – wherever they get better prices. It is farmer-friendly and also rupee-friendly. If domestic urban consumers have to adjust their consumption, that is the price that has to be paid or a cost incurred.

Import(ant) angle to rupee weakness

When I was doing some research for my recent weekly column in MINT on whether a rupee depreciation would help India, I came across some important statistics on India’s imports. Indirectly, they once again reaffirm the limitations of India’s growth numbers ever since the new methodology and the new base year came into effect.

There are five categories of imports:

22. Machine tools
23. Machinery, electrical & non-electrical
24. Transport equipment
25. Project goods
26. Professional instrument, Optical goods, etc.

These are taken from Table 130 of the Handbook of Statistics of the Indian Economy from the website of the Reserve Bank of India.

The sum total of value of imports (USD million) under these five heads in each of the last five years have been

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
68204.9 66083.9 57606.2 56889.5 56873.4 58877.9

Of course, there has been a big fluctuation in the value of the Rupee versus the US dollar in this period. So, we may be spending more in rupee terms but the dollar price may not have changed much. In other words, the dollar value does reflect the fact that we may be importing less of them either because they are now more expensive in rupee terms or because the economy might not be doing well or both. In some sense, the recovery in economic growth rates since 2012-13 as per CSO figures is not borne out by these numbers.

In fact, the quantity index of imports under the category, ‘Machinery and Transport Equipment’ confirms the above observation:

India_Machinery and Transport Equipment Import

Source: Table 138 of the Handbook of Statisics on the Indian Economy, Reserve Bank of India.

The chart is as important as it is dramatic. Quantum of capital goods imports has dropped substantially even as their unit value has gone up substantially, presumably because of the rupee weakness.

So, the more rupee weakens, the less we import of these goods and, consequently, India adds less and less to its productive capacity and potential. So, paradoxically, we will be importing more of the goods that would be produced locally with these machinery, otherwise. So, rupee weakness will make us import less of what we need and more of what we would otherwise be producing internally!

That is why I wrote that we should be sure of what we want, lest we get it!