Will the budget give a second boost to sovereign bond issues?
About 3 years back, the government was keen to push the idea of Sovereign bonds to raise capital. It is tantamount to borrowing by issuing G-Secs abroad. The only difference is that it is a forex risk
January 23, 2023
Will the budget give a second boost to
sovereign bond issues?
About 3 years back,
the government was keen to push the idea of Sovereign bonds to raise capital.
It is tantamount to borrowing by issuing G-Secs abroad. The only difference is
that it is a forex risk too. It is high time, India does that.
plan was dropped
In the Union Budget
of 2019, the center had planned an aggressive $10 billion sovereign bond target
for the year. The argument was that India’s forex reserve position was
comfortable and the rupee was also relatively stable. That made a strong case
for allowing sovereign debt. It has an element of uncertainty since the debt
has to be serviced in foreign currencies (typically dollars). Hence any
weakness in the rupee could be vicious for the economy, in the sense that the
INR and flows may feed on each other.
a rethink now
Back then, the PMO
had also gotten involved and amidst strident criticism, they had opted to put
the plan on hold. The same year, the world was hit by the COVID crisis, after
which the entire idea was put in the back burner. However, now that the COVID
pandemic is history and India has come out of it in a very convincing manner,
it is time to relook at that concept of sovereign bonds all over again. With
forex reserves having weathered the dollar storm, it gives a lot of confidence
to the government. Now, sovereign bonds are a risk worth taking.
What to be
The concerns of the
government in the previous round were not without reason. There are 3 risks in
sovereign bonds. Firstly, it can cause a lot of volatility in the currency
markets and also in the domestic bond markets as there would be a lot of trades
over which the center will have no control. Secondly, India had seen a sharp
fall in the rupee in 2022 and such a move would not only spike the liability of
the government, but also feed on rupee weakness. Lastly, issue of sovereign bonds
is the debt of central government and enhances its total debt as a percentage
of GDP. This also has major implications for sovereign ratings.
favors sovereign bonds?
There are a number of factors that are in favor
of allowing sovereign bonds. For instance, $10 billion is not a big sum if you
look at a $3.5 trillion economy and poised to grow to $5.0 trillion. In this
kind of backdrop, outstanding sovereign bonds of $10 billion or even $20
billion would not really make a dent. Secondly, the forex reserves are
comfortable at over $560 billion and if you add surplus on the services
account, the overall trade coverage is quite good. Lastly, it gives a benchmark
for the government bonds to be valued on a global risk basis and that could
give better benchmarks for the Indian government for its fund raising in
future. At this stage, India must not just remain inward looking!