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Opinion

Sell Indian companies our dollars; get rid of "reserves"

From ET:

Minister of State for Industry Ashwani Kumar said the government will consider Tata Group Chairman Ratan Tata’s proposal of setting up a special fund in select banks to help domestic companies repay foreign loans.

Tata, in a letter to the Prime Minister, has proposed the creation of a fund in select banks to help creditworthy corporations with funds in meeting exigencies.

Besides difficulty in rolling over the existing debt and fresh funds drying up, the depreciation of the rupee against the US dollar has further impacted the domestic companies with the increased cost for servicing overseas loans.

Effectively this is about using our forex reserves to help the Tatas and other Indian companies pay off their existing debt abroad. These companies aren’t getting dollars easy, so there.

So why not give them our ridiculously maintained forex reserves, in return for some extremely short term debt? Say 1 month duration, at an interest higher, by say 100 bps, than the G-Sec yields? And that are traded in the bond market, so the government can get out at any time? Roll over the debt as long as possible with a caveat – minimum interest paid is the first interest amount – can increase, but cannot decrease. (This ensures that in a lower interest rate and better credit market scenario, companies try to raise debt from the market and pay back the government which shouldn’t have been involved in company debt in the first place)

First, I think the companies will object, saying that boss, the government receives next to nothing for the dollars anyway. The counter-argument is: Dude, I’m paying 7.5% for the money I borrow. You pay me at least that, and for my effort, pay me 100 bps more. Sure I don’t get anything for the dollars I borrow, but I just made 20% in the rupee depreciation no? At least, 20% more rupees. And the credit squeeze has driven US T-Bill prices up so more moolah for me. Since you take away that benefit (and yes, perhaps the downside too, but risk is risk) please pay me at least what I would expect from others.

Second, the government is loath to give up dollars. This is a ridiculous position. In a currency of a country that is literally breaking down, there is no forward value – best to use up the reserves in whatever way possible and convert them to INR. Great time now, because in a 20 year view, the dollar in its current shape will weaken against the rupee. And it doesn’t matter if it does – the very act of our companies paying back external debt in full increases external confidence, and more dollars will eventually flow in, strengthening the rupee.

Last, there is literally no incentive for anyone to structure such a deal. Banks lose – no more fees on such loans. Companies don’t want to pay high. Bond Markets are non-existent so the exchanges don’t care. The Government has such a short term view they don’t care – because the impact of this is a 10 year thing, not 1 to 5 years, and they can’t see beyond their next elections.

What we need is some serious stomach lining. This is perhaps an economic nightmare – but I will say that rupee convertibility has got to happen now, and we need to get rid of those dollar reserves. I want to see rupee reserves in other countries. We gotta get someone else to pay for our debt; now that America’s getting off that pedestal.

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