India's Bond Market Could Benefit From Some Sin

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07/10/2019 | 11:07 am

By WSJ City

While governments in emerging markets have spent decades developing domestic bond markets, the India's finance ministry is turning to foreign-currency debt. Strangely, that might not be a bad idea, writes Mike Bird for Heard on the Street.


--- Finance Minister Nirmala Sitharaman said the nation would issue foreign-currency bonds.

--- Local media reported borrowing of about $10bn could begin in the second half of the year.

--- Governments tend to borrow in foreign currencies because they have to, not because they want to.

--- That phenomenon has been dubbed the "original sin" of emerging markets.

--- India's stock of public and publicly guaranteed external debt was the 10th lowest...

--- ...Of the 116 developing countries that provided data to the World Bank.

--- Its rupee-denominated general government debt runs to 67% of GDP, above the average of roughly 48%.

Why This Matters

Research published in The Review of Financial Studies by economists Robert F. Dittmar and Kathy Yuan suggests sovereign bond issuance improves the ability of corporations in the same country to issue in international markets, allowing investors to better price private-sector debt and aiding liquidity. That reduces yields and corporate bid-ask spreads, according to the authors.

Few countries are in a better position to see whether that's true than India, whose government has negligible foreign-currency debts.

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