The Telegraph
Since 1st March, 1999
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Flush with dollars, govt to pre-pay forex loans

New Delhi, Feb. 17: The government wants to pre-pay about $ 2.1 billion in high cost forex loans from various global agencies, this calendar year, out of its ever-increasing foreign exchange kitty.

This will be on top of some $ 4.5 billion on Resurgent India Bonds re-payments which India is slated to make in the coming fiscal. The pre-payment is being considered in order to reduce the government’s heavy dollar and euro debt pay-outs.

The government would have liked to replace the costly forex loans with a cheaper dollar denominated loan. In fact Indian money managers had gone scouting abroad for just this. But with news of this leaking out in global financial markets, BJP ministers reacted strongly and advised against any such move as they felt this could be portrayed in a negative light by the Opposition and could hurt their electoral prospects.

As the Union government wants to show off the mounting forex kitty which now stands at $ 73 billion as one of its major achievements, BJP spin managers feel another forex loan to replace the current loan could well be criticised as the electorate would not get down to the nitty-gritty of which loan is cheaper and which one is costlier.

The government is instead weighing the option of extinguishing the forex loan and taking a fresh rupee loan through bonds amounting to about Rs 10,000 crore which could be used to fund the same projects for which the foreign exchange loan had been taken.

This rupee denominated loans will carry coupon rates of 6.5-7 per cent as even these work out cheaper than the amount paid out as interest and cover charges for the foreign currency loans which the government would like to retire.

While these old forex loans too carry a 6.5-7 per cent interest rate, they also carry cover charges which make the pay-outs on these loans costlier at 8-9 per cent.

Foreign exchange loans can now actually be accessed by India at rates as low as 1.2-1.4 per cent, which is what had initially kicked off the move to go in for a debt swap.

But political opposition has put this move in the back burner. Despite this, finance minister Jaswant Singh has, in meetings with his core budget team and the country’s money managers from the department of economic affairs and the Reserve Bank of India, indicated that the foreign debt retirement plan should continue apace. He also indicated that this could be announced in the budget if a workable plan can be put up before him in time.

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