Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iimahd.ernet.in

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Wed, 05 Apr 2006

Foreign investment in rupee debt

Ajay Shah has written an interesting piece about what is wrong with India’s policy on foreign debt. His most important point is that India restricts foreign investment in rupee debt while being much more liberal about Indian companies borrowing in foreign currency internationally. I agree with Ajay Shah that this is truly absurd but it is fully explained by the political economy of the situation. The corporate sector usually gets what it wants through intensive lobbying. This happened in East Asia before the crisis and it is happening in India now.

We should work towards getting rid of ‘original sin’ and replacing foreign currency debt with rupee debt. There are though two caveats. First if foreign investors are allowed to hedge currency risk, then the true national exposure may still be that of foreign currency debt if it is an Indian entity that stands on the other side of the hedge. In fact, the effective position of the nation can be that of short term foreign currency debt. This problem is not insurmountable but some thought needs to be given to it.

Second, as Martin Wolf points out, many countries have been able to overcome ‘original sin’ and borrow in their own currencies “once they have persuaded their own citizens to lend to them”. We need a proper government debt market instead of the captive market that we have now.

Posted at 13:55 on Wed, 05 Apr 2006     View/Post Comments (0)     permanent link




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