Hey PM Modi, India’s Dollar Bond Can Ease Covid-19 Economic Crisis
A one-hundred dollar banknote and Indian ten rupee banknotes, in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Hey PM Modi, India’s Dollar Bond Can Ease Covid-19 Economic Crisis


5 a.m. The phone rang, its tone so harsh at that ungodly hour. But I somehow stumbled awake and took the call from my buddy, Mr. NRI, from New York.

NRI (cheerfully): Good morning! I am so confused by your government’s stimulus package that I just had to call you. Modi says it’s Rs 20 lakh crore, but Chidambaram puts it at less than a tenth of that. Tell me, has Modi slogged it over the boundary for a big six, or just tamely holed out to mid-wicket?

It took me a while to figure out his analogy from the pre-Covid age when India was mad about an extinct game called cricket. Just how do I tell my friend that in the post-Covid digital era, we’re all hooked on to online Ludo.

Hey PM Modi, India’s Dollar Bond Can Ease Covid-19 Economic Crisis

I (still a bit groggy): Well, since you are talking cricket, lemme ask you – if a batswoman takes six dull singles in one over, and her captain proclaims grandly that ‘she’s scored a six’, what would you call that? Being truthful?

NRI (confused): It’s a “technical truth”, but in spirit, it’s a half-truth.

I: That, my friend, is what the Modi 20 Lakh Crore ‘stimulus’ package is! It’s mixed up guarantees of three lakh crores, back-stops, tax refunds, free foodgrain, guarantees to give guarantees of another one lakh crore, and cash transfers of a few thousand crores, all of which is somehow adding up to the magical number.

NRI (even more confused): So Chidambaram is right? The actual cash outlay is just a piffling amount?

I (after a pause): Well, the truth is never so simple in your erstwhile homeland, my friend. Because even though guarantees are not cash, they are often equal to cash in our muddled banking system. Let me explain. Since our bankers are sh*t scared to lend to companies, they just buy an extra four lakh crores of government securities, i.e., they just give the money right back to Modi. But now, since Modi has guaranteed that bankers will not lose, they’ve mustered the guts to pull out four lakh crores from G-Secs and give that cash to real businesses. Do you get it now? Even though Modi has not given cash directly to these small companies, he has given a guarantee so that the cash which was being given back to him is now going to be lent to factories and shops. So in that sense, he can claim, quite legitimately, that “I’ve given direct cash”, even though he hasn’t. These things happen only in India!

NRI (I couldn’t see him, but I am sure he was nodding): Okay okay, I get it. A six is a six, whether you score it in singles, or whack it out of the ground. But tell me, I also read that Modi sold $20 billion (Rs 1.5 lakh crore) of U.S. treasuries in April? Why did he do that?

I (not wanting to sound ill-informed): Nobody quite knows that, but the theory is that RBI bought rupee bonds with that money to keep interest rates low in India. Also sold extra dollars in the local market to stop the rupee from falling off a cliff.

NRI (now that he was on familiar territory): What nonsense is that? Why didn’t Modi just sell dollar bonds on NYSE? That would have gotten him a lower interest rate in India, and a harder rupee, without having to hawk his stock of U.S. treasuries. You bloody Indians are %*&@*#, what can I say…

Mercifully, the call snapped at that point. I put the phone on silent, and went back to sleep.

Flashback to Modi 2.0’s First Budget

They say a troubled mind ‘thinks’ through sleep. So I woke up a second time that morning with a throbbing question:

Why, yes why, did Madame Sitharaman not revive her Budget 2019 promise to float $10 billion of Sovereign India Bonds in overseas markets? Especially now, when interest rates in the U.S. are at unprecedented lows, with the 10-year treasury at under 1 percent for the very first time in history!

If you agree to pardon my over-use of cricketing metaphors, I shall repeat my words of joy written on July 6, 2019, a day after her maiden budget:

Hey PM Modi, India’s Dollar Bond Can Ease Covid-19 Economic Crisis

Unfortunately, her bold idea was swiftly killed by risk-averse advisors. It will be worth our while to re-examine each objection one-by-one:

Objection: Volatile dollar/rupee rates will create ‘unquantifiable’ costs in the long term.
Counter: Wrong. By paying a premium of 5-odd percent to hedge against future dollar rates, our costs will forever be controlled and quantifiable. While the hedged interest rate would be a few basis points higher than what the government could borrow at in local markets, these shall get compensated by the several positives that accrue on venturing overseas, including the fact that private borrowers get more cash in domestic bond markets.
Objection: Why go overseas when you can ask foreign portfolio investors to lend more in the domestic market, i.e. sell them more rupee bonds?
Counter: This one is specious. Because when you float a sovereign bond overseas, you access an entirely new category of lenders, over and above FPIs that are authorised to invest in India.
Objection: Foreign investors could indiscriminately dump our bonds, creating a run on the rupee and ‘importing’ contagion.
Counter: False. Since the bonds will be denominated in dollars and traded on overseas exchanges, any ‘dumping’ would not directly impact the rupee or domestic markets. In fact, the alternative being advocated above, of increased FPI exposure to rupee bonds, creates exactly the ‘dumping risk’ that is being wrongly attributed to dollar bonds.
Objection: India could stare at an international default in frightful, flight-ful times.
Counter: This fear is not even worth the amygdala it’s engineered on. India gets an annuity of nearly $70 billion from its hard-working sons and daughters living overseas who willingly repatriate to their loved ones left behind. NRIs have also kept an unflinching $100 billion in term deposits in their motherland. Finally, India’s forex reserves are nearly 49 times $10 billion (and growing). If we can’t have the stomach for this much risk, let’s just quit (or take voluntary retirement).

Clearly then, if dollar bonds made sense in 2019, they make much greater sense in the post-Covid fightback. And when their babus (bureaucrats) object saying “but you abandoned this idea last year”, M/s Modi & Sitharaman should retort, a la John Maynard Keynes:

“When facts change, we change our minds. Now go do it.”

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of three books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, ‘Super Economies: America, India, China & The Future Of The World’, and ‘Super Century: What India Must Do to Rise by 2050’.

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