India to Issue its First Foreign Currency Sovereign Bond?

Mitu Gulati & Mark Weidemaier

The two of us are beginning a project to build a dataset of foreign currency sovereign bonds and their contract terms. The dataset of bond issuances has a conspicuous absence: India.

Turns out India has never issued a foreign currency sovereign bond. Some state-owned enterprises have ventured onto the foreign markets in search of investors, but not the sovereign. This is a bit puzzling because India certainly has the economic growth and financial prospects to attract foreign investors. Countries like the Philippines, Turkey, Argentina, Mexico, Brazil, Russia, and China regularly tap the international markets. Indeed, closer to home, many of India’s smaller neighbors, such as Sri Lanka, Pakistan and even little Maldives, have tapped the foreign currency sovereign markets. We also know from our research that there is considerable appetite for Indian sovereign issuances from big investors in places like Singapore and Canada. The interest is such that foreign funds buy Indian domestic currency issuances despite the inflation risks they pose. Presumably, these funds would jump at the opportunity to buy a foreign currency issuance.

So, why not India?  Or, perhaps we should ask: Why now India? There are conflicting reports, but the government appears to be considering issuing an international, foreign-currency bond, likely yen- or euro-denominated. In a recent budget speech, the Finance Minister of India announced the plan (see here, for a recent Bloomberg story). Other reports, however, indicate that the office of Prime Minister Narendra Modi has developed cold feet about the plan (see Bloomberg here). The Economic Times of India (here; and also this Money Control article) also describes how the senior bureaucrat who was in charge of the issuance has been transferred from the Finance Ministry to a less prominent position and is seeking to retire early.

So it remains to be seen whether India will soon issue foreign currency debt. It’s curious, however, that India has avoided foreign currency borrowing for so long. Politicians around the globe seem to be extremely fond of external borrowing, and India’s politicians have never struck us as especially responsible in comparison to their compatriots. Maybe government officials have internalized a commitment to avoid dependence on foreign currency investors. Given India’s long history of left leaning governments, this would not be altogether surprising.

This year though, things appeared to have changed. Narendra Modi’s BJP government, with an avowedly pro-market philosophy (albeit, a nationalist one), won re-election by a landslide. And, some months ago, India’s Central Bank gave permission to one of India’s states (Kerala) to do the first ever foreign sovereign issuance by an Indian state (it was a state guaranteed bond on the London Stock Exchange – see here). The Kerala issuance, while in foreign markets, was done in local currency, but it wasn’t long thereafter that the government seemed to endorse the idea of issuing about $10 billion worth of foreign-currency sovereign bonds. The announcement was noteworthy not only because it would have been India’s first ever such issuance, but because of the plan to bypass the New York market (a frequent favorite of new issuers) and tap a combination of the yen and euro markets.

The plan to avoid the New York market was especially interesting to those of us who study the foreign sovereign bond markets and are frequently frustrated by the unwillingness of the players to innovate. Given that India is going to be a strong issuer, which can probably demand relatively favorable terms, we were eager to see whether it would deviate from the typical boilerplate bond provisions and ask for tailored provisions addressing sovereign immunity, governing law, listing provisions, and similar matters.  

We confess to not really understanding the local political situation. But if India and its multiple states do embrace the foreign currency sovereign markets, as they appeared poised to do in a big way just a few days ago, that has the potential to change an important global market.