Lok Sabha Question No. 4370 (UNSTARRED), answered on 2017-08-11
Subject: Local Currency Loan in Indian Rupees
Ministry: FINANCE
Asked by: BALABHADRA MAJHI

## LOK SABHA UNSTARRED QUESTION NO. 4370

## TO BE ANSWERED ON FRIDAY, August 11,2017 / Shravana 20, 1939 (Saka)

## Local Currency Loan in lndian Rupees

## QUESTION

## 4370. SHRI BALABHADRA MAJHI:

Will the Minister  of FINANCE be pleased  to state: -

- (a) whether the Government has explored the possibility for availing  of local currency loan in lndian Rupees instead of LIBOR based dollar denominated  loan from World Bank and Asian Development  Bank (ADB) which has inherent exchange rate fluctuation risk;
- (b) if  so the details  thereof; and
- (c) the comparative advantage and disadvantage of local currency  loan over doliar  denominated  LIBOR  based  loan?

## ANSWER

## MTNTSTER OF STATE rN THE M|NISTRY OF FTNANCE (SHR| ARJUN RAM MEGHWAL)

- (a) Yes Sir
- (b) Loans from the lnternational  Bank for Reconstruction and Development (lBRD.1 of the World Bank are committed in United States Dollars (USD), and the rmplementing  agency can access INR financing from IBRD by exercising the built.rn  currency conversion  option in IBRD loans to convert disbursed and outstandrng amounts  into lndian Rupees  (lNR) at any time during  the life of the loan The Government  of India regularly  liaises with IBRD on the possibility  of converting new and existing loans into lNR.

The availability  of INR financing,  and the terms and conditions  that IBRD could obtain, would depend on market conditions at the time of execution  of the conversion.  IBRD could source INR financing either via the swap market or by direct bond issuance

The Government of lndia had also requested  the Asian Development  Bank (ADBt to explore the possibility of providrng the option of local currency financing in addition to USD denominated loan option for the ADB assisted projects  in lndia ln response, ADB has proposed  to introduce  an option of local currency financing for the  "Second West Bengal Development  Finance Programme (WBDFP-ll) , whrch comprises a loan amount of USD 300 million. The said loan has been negotiated between  Government of lndia, ADB, and Government of West Bengal on 7th July, 2017. The proposal is yet to be considered by the Board of Directors  of ADB.

The local currency  financing option proposed by ADB for the above mentioned project provides Government  of lndia an option to  request disbursement  of loan in lndian Rupee, either in part or fully, in addition to the prevailing  option of seeking  disbursement  in USD. However, the local currency financing option will be at the discretion of Government of lndia.

(c)  The comparative  advantages  and disadvantages  rn terms of local currency loan over dollar denomrnated  LIBOR based loan depend on the needs and circumstances  of the project and the borrower,  and involves a tradeoff between cost and risk.

In general.  borrowing in local currency would reduce the foreign exchange risk of a borrower who does not have a source of USD revenues.  However,  in shailow domestic markets,  the nominal interest rate in local currency  may be higher than the nominal interest rate in USD.

Moreover. in adverse Balance  of Payment position, dollar loans will help to trde over the adverse situatron.