India’s low government external debt-to-GDP ratio, strong balance of payments and fairly stable exchange rate augur well for a 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 Budget proposal that the government would raise a part of its gross borrowing in external markets in external currencies, the bank’s research report ‘Ecowrap’ said reasonable level of foreign borrowing by an emerging market is likely to enhance its economic growth.

The report assessed that looking at the yield differential between India’s 10-year Government security (G-sec) vis-a-vis US 10-year G-sec, it is clearly possible that interest savings will be close to 3 per cent.

Capital inflows from developed countries can supplement 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 ₹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 total current forex reserves and 29 per cent of net foreign direct investment (FDI) 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 with the bond yields softening, it will help banks increase their bottomline through treasury profits,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

This will have a positive impact on the provisioning ratio of banks. The bank envisages that the treasury profit-to-provisioning ratio of Indian banks would touch new highs this fiscal — reminiscent of the FY02-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, as per the report, will create a provisioning buffer, and is expected to increase the ratio, going forward.

Comparison

A comparison with Latin American and Asian economies is imprudent and naive, 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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