Will Resurgent Bonds work ?
Another spree of Resurgent India Bonds (RIBs), that too just after two years? In 1998, the Government had introduced RIBs for the first time and had raised $4.23 billion. The RIBs then issued were at a time when the market sentiments abroad were adverse. This time it is in the wake of the rising oil prices and the expected crisis therewith. With the pile of borrowings that we already have, is it necessary then for such a step?
Well, it is not. The Government also agrees to this. The RIBs are not being raised to meet the extra expense arising out of the rising oil prices but just as a precautionary measure. The Government's current financial situation provides an inbuilt cushion for a burden of upto $10 billion, which is much better as compared to what it was when RIBs were raised for the first time in 1998. This time, if around $5 billion are raised, the Government can be in a comfortable position.
Last time the interest rates were 7.75 percent, 8 percent and 6.2 percent in US$, Pound Sterling and Deutsche Mark respectively. Moreover, the situation in other economies was adverse, hence it was easier to raise money. But this time, the Government will have to offer higher rates of interest to attract investments. The six-month Libor is at 6.85 percent and the US rates are at 6.5 percent. While the former is likely to go up, the latter is likely to remain unchanged.
With the principal repayment due after three years from the first issue and the huge interest liability, what will be the Balance of Payment position at the end of the year? Already, the Government pays over Rs.80,000 crore as interest on the loans taken from outside. How then will the Government repay the principal amount? Will it go for another RIB? How will the Government end this cycle is the question. Is the government of India and the RBI listening?
Tanuja R Nemivant