The Hindu Business Line : Economics of prepayment

THE PREPAYMENT OF official Japanese credit is one more in a series of such transactions that New Delhi has undertaken in recent times. The latest announcement, for instance, comes on the heels of a decision earlier this year to prepay Canadian development assistance. The policy of prepayment of external debt has in a sense become unavoidable as the earlier practice of mopping up surplus foreign exchange and simultaneously sterilising the resultant excess liquidity through sale of dated government securities was fast losing steam. For the simple reason that the inventory of dated securities is inadequate to handle the flow of foreign exchange. In the event, the prepayment by the Government with the corresponding element of swapping the Reserve Bank of India's foreign exchange reserves for fresh issue of securities is no doubt helping the RBI replenish its depleting war chest of dated government securities for managing future exchange flows to keep the currency market stable.

But even as the RBI is readying itself for this campaign of maintaining stability, the challenge before it is only getting to be ever more daunting. The capital flows in the form of portfolio investments by overseas investors are expected to grow at a robust rate. A Standard & Poor's research report, for instance, is forecasting a near trebling of such inflows this year over the record inflows of the previous year. The spate of big-ticket primary market offerings that is on the anvil can only expand the pool of available investment options for these investors. Also, deposits by non-resident Indians continue to show buoyancy despite the gradual dismantling of arbitrage opportunity in the Indian market. The costs of a policy of intervention and thereby denying full play to the market forces, even if they now seem well within manageable limits, may not remain so in the future. There is, therefore, need for a wider public debate. But the problem in sustaining a meaningful debate on the question has been the lack of information on relevant costs. For instance, even on something as basic as whether the country is liable to pay a premium for exercising the option of prepayment, and if so the quantum thereof, neither the Government nor the RBI has cared to take the public into confidence.

In the days to come, prepayment could well become a matter of a proactive treasury management policy instead of a purely defensive reaction to a hardening rupee, as now. A weak US economy with its implications for the dollar's external parity and the widening interest rate differential in overseas and domestic market are factors that send monetary authorities thinking along those lines. But, unfortunately, the present structure of financial disclosure by the RBI is not geared to capturing, transparently, the possible impact of its decisions on these questions. No doubt, the RBI has acquitted itself quite creditably in managing the monetary aspects of the macroeconomy. But adherence to the highest traditions of accountability demands greater disclosure of information to the general public.

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