Budget 2019: Why Former RBI Governor Rangarajan Thinks Sovereign Borrowing Is A Bad Idea

India’s plan to borrow in foreign currency, to supplement domestic borrowings is a bad idea, according to former Reserve Bank of India Governor C Rangarajan.

“We have discussed this since early 90s, right after liberalisation,” he told BloombergQuint in an interaction. “We have discussed it’s much better that sovereign borrowing in foreign currency should be avoided.”

While we allow foreign institutions to buy Indian government bonds in rupees, the exchange risk there is borne by the outsiders, he said. “If India borrows in foreign currency, the exchange risk will be borne by us.”

India’s external debt is currently low and the government will now start to borrow a part of its funding requirement from the overseas market in foreign currency, Finance Minister Nirmala Sitharaman said today. The government didn’t specify what proportion of its borrowings would come through foreign currency borrowings, such as sovereign dollar bonds. The decision marks a fundamental shift in the way India looks at its budget and its borrowing needs, said Abheek Barua, chief economist at HDFC Bank.

Speaking about the ideal amount the government should borrow in foreign currency, Rangarajan said that it depends on the net amount of foreign funds present in the country.

In today’s speech itself, the finance minister pointed out that India’s foreign inflows grew 6 percent in financial year 2018-19 when globally foreign inflows declined. “If that is the situation I don't see any compelling reason the government should go out and borrow.”

Watch the full conversation here: