Gupta: Cash-rich

New Delhi, March 27: Helped by rising foreign exchange reserves, the government will prepay offshore debt owed to financial institutions in the next fiscal starting April 1, a top government official said.

The country’s foreign exchange reserves is currently placed at a record $109.998 billion which has been driven by steady growth over the past two years, when a booming economy and stock markets along with a strengthening rupee attracted foreign capital.

“We will continue with our policy of prepaying offshore debt,” D. C. Gupta, finance secretary, told The Telegraph, on the sidelines of an industry seminar.

In 2003, the government had prepaid around Rs 14,015 crore worth offshore debt owed to global financial institutions and bilateral debt worth Rs 7,491 crore, owed to more than a dozen countries.

The finance secretary, however, said the government had yet to decide on the size of prepayment, which would be done after due analysis and is expected to be financed through domestic government borrowings.

The country’s foreign debt is currently around $100 billion against $98 billion at the end of March 31, 2002 and $99.7 billion a year-ago. The country enjoys a Baa 3 sovereign rating by Moody’s Investors Service, which means ‘borderline investment’ grade.

The repayment would be fiscal deficit-neutral, analysts said, as the borrowing will be matched by a deletion of equal amount from capital account and hence will not impact the fiscal deficit.

Since the loans are to prepaid through domestic market borrowing, this would help the government to absorb some of the excess liquidity in the system.

Some economists, however, are voicing concerns over the impact of low global interest rates on the country’s large reserves, and the sterilisation costs involved in countering the effects of rising domestic liquidity.

“The optimal level of foreign exchange reserves depends on the size of the external debt and the trade balance,” said an analyst with a global consulting firm. “We are getting to the point where additional reserves would have a larger cost attached to them than benefits,” he added.

India’s $560-billion economy has also been on a roll in the past year. In 2003, foreign funds invested $7.6 billion in Indian stocks and debt, more than twice the amount in the previous year which drove the benchmark 30-stock Bombay Stock Exchange index by more than 70 per cent in 2003.

Growth during the current financial year, forecast at 8.1 per cent, will be the fastest expansion in nearly 15 years and twice last year’s level of 4 per cent, when a drought wiped out both farm sector output and consumer demand.