FinMin looking at sovereign bonds for foreign investors

* Proposal to be taken up when ratings firm Fitch comes calling

Written by Shruti Srivastava | New Delhi | Published:April 8, 2013 1:11 am

The government is considering a proposal of issuing sovereign bonds to foreign investors,a move that will help the country in enhancing its forex reserves while at the same time bring in meaningful inflows in India. The proposal is being debated and is likely to be taken up when representatives of credit rating agency Fitch meet the finance ministry officials this weekend.

“The debt management office is discussing the feasibility of issuing sovereign debt bonds. It is contemplating if the government can issue debt in foreign currencies to lower the cost of financing the budget deficit,” an official source told The Indian Express.

The exact issue being discussed with Fitch is the government response to a query from the rating agency on the “status of the plans to issue debt in foreign currencies to lower the cost of financing the budget deficit”.

Each year,the months of April and May is usually the period when rating agencies call on the finance ministry to assess the government’s fiscal plans. Moody’s and Standard & Poor’s are also expected to drop in later this month.

The idea for a sovereign debt issue was floated last year in Budget 2012-13,by former finance minister Pranab Mukherjee who included it in the Fiscal Responsibility and Budget Management (FRBM) statement for the first time.

It said: “With a gradual decline in net inflows from multilateral institutions in the coming years,government would have the option of exploring other sources of external debt in the form of sovereign bond issuance.” The intention was to help India maintain a reasonable mix of domestic and external debt in its portfolio.

India had earlier in 1991,1998 and 2000 issued sovereign bonds. It had raised $1.6 billion through the India Development Bond in 1991,$4.2 billion through Resurgent

India Bond in 1998 and $5.3 billion through Millennium India Deposit in 2000.

Experts argue that the issuance of such bonds will usher in more transparency and strengthen the rupee. “If such bonds are issued,it will certainly bring in meaningful inflows in the county as there is a lot of appetite for Indian papers. It will also help in increasing foreign reserves,” said Jagannadham Thunuguntla,head of equity research, SMC Global Securities.

This is also likely to provide real time information about India’s credit risk to the world,bringing in more transparency for credit rating agencies.

Fitch is visiting on April 12-13 to assess the macro-economic situation. Currently,the rating agency has assigned India a BBB-minus rating — the lowest investment grade rating — and had warned of a possible downgrade last month.

TOWARDS FUND FLOWS

* The idea for a sovereign debt issue was floated in Budget 2012-13 with a mention in the FRBM statement

* The objective is to lower the cost of financing the budget deficit

* Experts feel sovereign bonds would bring in more transparency for credit rating agencies and strengthen the rupee

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