)
The finance ministry is well prepared to handle the tapering of quantitative easing by the US Federal Reserve whenever it comes, said a senior official. The ministry is fully prepared to come out with an action plan if that happens, he added.
According to the official, the action plan may include expanding quasi sovereign bonds to more entities such as banks. Besides, the limit of quasi-sovereign bonds may be raised and external commercial borrowings (ECBs) norms may be tweaked.
Last month, the ministry had allowed public sector financial institutions such as Power Finance Corporation, India Infrastructure Finance Company Ltd and India Railway Finance Corporation to go for quasi-sovereign bonds to fund long-term infrastructure needs and asked oil companies to raise ECBs. The government had targeted $4 billion from these two sources - quasi-sovereign bonds and ECBs by public sector oil companies.
| ACTION PLAN |
|
The other option is to go for sovereign bonds. “In fact, sovereign bond is still on the table and has not been ruled out as yet,” said the official.
Earlier, the ministry had given conflicting views on sovereign bonds. While some officials said the bonds were not required, finance minister P Chidambaram told reporters bonds were one of the options.
According to the finance ministry, sovereign bonds are a much better idea than NRI bonds. A few months ago, the ministry had said it might issue such bonds at regular intervals. Officials had said NRI bonds might not be considered, as that would merely lead to shifting funds from fixed deposits by NRIs in banks, known as foreign currency non-resident (FCNR) accounts, to sovereign bonds.
Now, the choice is between a sovereign bond directly issued by the government and a quasi-sovereign bonds by public sector banks, with government backing. The government had, however, opted for quasi-sovereign bonds by public financial institutions and not banks. Banks may now be the next option, in case tapering of QE happens in the US in December.
So far as NRI bonds are concerned, the official said interest rates on FCNR could be raised to attract inflows.
When asked about these measures, which would exactly be used, the official said it would depend on the quantity of tapering as well as India’s current account deficit (CAD).
CAD rose to an all-time high of 4.8 per cent of GDP in 2012-13, which the finance ministry has targeted to cut to 3.7 per cent in the current financial year. In absolute terms, CAD is targeted to be reined in at $70 billion in 2013-14 from $88 billion a year ago.
The finance ministry is confident of funding CAD with net capital inflows without drawing down from forex reserves. However, the Prime Minister's Economic Advisory Council (PMEACo) has estimated that $8.6 billion could still be required to be withdrawn from forex reserves to finance CAD in 2013-14.
If the Fed actually tapers QE, capital flows to emerging market economies, including India, will reduce. This would further increase the requirement of drawing down from forex reserves to fund CAD.
According to experts, the Fed can’t delay the tapering forever as no economy can keep on pumping money. It is better to prepare for it now, said a finance ministry official.
CAD figures for the first quarter of 2013-14 are slated to come on Monday, which is widely expected to be quite high. The finance ministry expects that the later three quarters would see remarkable decrease in CAD figures.
The Fed on last Tuesday had surprised the markets by continuing with its monthly $85 billion bond buying programme for want of solid evidence about growth recovery. Although the markets were euphoric over the decision, the ministry had called it “business as usual”.
