Quasi-sovereign issue to finance India's current account deficit

Finance Minister P.Chidambaram said on Wednesday that the government would raise long-term foreign money in five different ways to provide stable sources of finance to reduce India's current account deficit (CAD). One route would be a proxy of sorts for a sovereign bond issue. He was addressing a press conference in New Delhi to mark the completion of a year in his third stint as finance minister.

The options chosen by the government do not include a sovereign bond offer, which Reserve Bank of India governor, D. Subbarao, is opposed to. Speaking to the media immediately after announcing the July 30 monetary policy, he had said the costs likely to arise from a sovereign bond issue outweighed the benefits.

The five options are: enhanced  liberalisation of foreign direct investment, allowing some public sector companies to raise money abroad, continuing to engaging sovereign wealth funds and pension funds interested in India, raising money from Non Resident Indians and loosening restrictions governing Indian companies which wish to borrow abroad.

Chidambaram described the move to allow public sector companies to borrow abroad as a "quasi-sovereign" issue. The government has not yet decided the extent of borrowing to be allowed.

The decision to loosen restrictions governing overseas borrowing by Indian companies will be taken in consultation with the RBI, said Chidambaram.

Chidambaram acknowledged the RBI's concerns about a sovereign bond issue, but said the government continued to retain it as a policy option. "That is an option on the table, but we will not rush into any decision," he added.

The rupee on Wednesday closed at Rs 60.40 to the US dollar, a gain of 7 paise from Tuesday's close. It has depreciated by 8.6 per cent since May 23, the trading session in which the current weak spell started. The previous evening a statement by US Federal Reserve Chairman Ben Bernanke had been interpreted by global investors as a signal that the country's monetary stimulus was going to be rolled back. Promptly, emerging markets such as India recorded an outflow of foreign portfolio investment.
 
Chidambaram sidestepped a question on how long RBI's current policy of nudging up interest rates indirectly as a measure to defend the currency would continue. "For as long as it is necessary to quell speculative activity," was his response.

"We do not countenance speculative transactions on the rupee, especially in overseas markets," he added, referring to the non deliverable forward (NDF) market for Indian currency in Dubai and Singapore.

Participants in the currency market claim that the difference in price between NDF markets and currency futures in India provide an arbitrage opportunity for companies with a presence in both markets. Exploiting this arbitrage opportunity, they claim, has added to the downward pressure on the rupee.

The current account deficit, which is the primary indicator of India's weakness in its trade with partners, was a record 4.8 per cent of gross domestic product, or $87.8 billion, in 2012-13.

Chidambaram did not indicate the government's estimate of CAD in 2013-14, but said the deficit would be entirely financed through foreign inflows and RBI would not have to dip into India's foreign exchange reserves to finance the deficit.

The finance ministry has revised the economy's growth forecast of 2013-14 to a range of 5.5 per cent to 6 per cent from the earlier estimate of over 6 per cent. Subbarao, in his monetary policy announcement, said RBI's current estimate is the economy will grow 5.5 per cent in the current financial year.