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India’s low government external debt GDP ratio, strong balance of payments and fairly stable exchange rate will augur well for long-term foreign borrowing, according to a State Bank of India research report. Going by the international evidence, India is best placed to tap the sovereign bond market now, it added.
Referring to the Union Budget proposal that the Government would start raising a part of its gross borrowing programme in external markets in external currencies, the bank's research report ‘Ecowrap’ said reasonable levels of foreign borrowing by an emerging market are likely to enhance its economic growth.
The report assessed that considering the yield differential between India’s 10-year (yr) Government security (G-sec) vis -a-vis the US 10-year G-sec, it is clearly possible that interest saving would be close to 3 per cent.
Capital inflows from developed countries can supplement the relatively low level of domestic savings and boost investment in the recipient country, leading to enormous economic and social benefits.
The report expects that the Government will go for $10 billion (around Rs 70,000 crore or 10 per cent of gross market borrowings) worth of sovereign bonds initially. This amount is merely 2.3 per cent of India’s current forex reserves and 29 per cent of net FDI (foreign direct investment) flows in FY19.
"We believe the direct benefit of a lower cost of borrowing may not be significant. This is because of the swap cost that is associated with such borrowings.
"However, the indirect benefit will be significant as softening bond yields will help banks increase their bottom-line through treasury profits," said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
This will have a positive impact on the provisioning ratio of the banks. The bank envisages that the treasury profit to provisioning ratio of Indian banks would touch new highs in FY20, reminiscent of the FY02 to FY04 period.
Treasury profit to provisioning stood at 62 per cent in FY04, but declined substantially to 3.3 per cent in FY12. The trend reversed and increased to 34.6 per cent in FY17, but declined again in FY18. With the decline in G-sec yields, banks, according to the report, will create a provisioning buffer and are expected to increase the ratio, going forward.
Comparison
Comparison with the Latin American and Asian economies is imprudent and naïve, the report said. For example, such countries had an average 51 per cent of debt denominated in foreign currencies /GDP, debt/GDP at 124 per cent, CAD/GDP at 6 per cent, investment inflows at 9 per cent and GDP growth at 5 per cent just before the crisis.
In contrast, India’s external debt/GDP is at 19.7 per cent, sovereign foreign currency debt /GDP at 3.8 per cent and investment inflows /GDP at 1.5 per cent. Also, the Government is not planning to go overboard with its external borrowing programme, elaborated the report.
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