Assume that 10-year zero coupon Indian rupee debt is sold by the Indian government to

domestic investors at a yield APY of 10% per annum. Suppose that World Bank, a AAA rated

entity world-wide with no default risk, wishes to issue rupee debt of the same maturity on

the same date. World Bank can sell matching maturity dollar debt at yield of 4% per annum.

The rupee trades on the issue date at INR 60 = 1$. An investor wishing to buy or sell rupees

10-year forward will pay INR 107.45 = $1, which is equivalent to an annual currency

depreciation rate of 6% per annum.

Assume that investors are rational and that taxation is symmetric in the sense that all

investors in debt are subject to a single tax rate that cannot be avoided or evaded (That is,

this question is not about taxes). Use analytic frameworks of the sort taught to you in the

course to answer this question.

Indian politicians argue that "Let World Bank borrow at 8% and onlend

the money to the Indian government at 8.25%. This lowers the country's cost of

capital." Evaluate this argument.