Opinion

Defending Dollar Debt: FM Sitharaman’s Proposal to Issue Foreign Currency-denominated Sovereign Paper Has Merit

Marti Subrahmanyam

By Marti Subrahmanyam

While some of Rajan’s arguments are worth pondering, others are simply invalid. It is important, therefore, to subject these arguments to close scrutiny.

By Marti Subrahmanyam

In a recent column Raghuram Rajan, the former governor of the Reserve Bank of India made the case for why the Budget decision to issue foreign currency debt has no real benefit and poses enormous risks. While some of Rajan’s arguments are worth pondering, others are simply invalid. It is important, therefore, to subject these arguments to close scrutiny.

Rajan begins by erecting a few straw men purportedly proposed by investment bankers – that rupee yields can be compared with those in foreign currencies, and that the clientele for the foreign currency-denominated sovereign bonds is entirely different from the one for rupee-denominated bonds – and proceeds to demolish them. No serious analyst would have advocated such positions to begin with, and they are not worthy of serious consideration.

Rajan makes four other arguments that need to be addressed more carefully: that the notion a foreign currency-denominated Indian sovereign yield curve would be established by such issuance is wrong; the issuance of foreign currency-denominated Indian sovereign paper would hinder the internationalisation of the rupee; the issuance of additional foreign currency-denominated Indian sovereign paper would encourage a bond-issuing binge as an “addiction”; and since one could relax current ceilings on foreign portfolio investment and additional investment into rupee-denominated sovereign paper would occur, there is no point in issuing such paper.

Read full article in The Times of India.

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Marti Subrahmanyam is the Charles E. Merrill Professor of Finance, Economics and International Business