The government is exploring borrowing in yen to meet part of its borrowing needs this fiscal year. The government has budgeted borrowings of Rs 4,51,000 crore in 2009-10 for increasing social spending and investing in infrastructure.
The government is mulling a Samurai Bond issue guaranteed by the Japan Bank for International Cooperation (JBIC), banking sources said. Samurai bonds are bonds issued in Tokyo by non-Japanese entities to access investment capital from Japan. Bonds guarantted by the JBIC would help the government borrow at lower interest rates than what its rating suggest.
Any move by the government to go ahead and borrow from overseas capital markets for the first time would help in easing the effect of crowding out (making less money available to) firms. It would also help prevent a spike in interest rates because of record government borrowing.
Moreover, if the government diverts part of the borrowing to overseas markets, it would lessen the impact on interest costs.
Robert Prior-Wandesforde, senior Asian economist with Hongkong and Shanghai Banking Corporation, said, “The government’s priority of building a welfare state will ultimately need to be financed by structural tightening measures. Otherwise, it is going to be very expensive for the government to borrow money.”
Another advantage of borrowing overseas would be the strengthening rupee. The greater the rupee strengthens the lower would be the cost of such borrowings.