In a move towards greater capital account convertibility,the finance ministry has signalled its intent to sell sovereign bonds to foreign investors. For the first time ever,finance minister Pranab Mukherjee has outlined the option of selling sovereign bonds overseas in the Budget 2012-13 papers.
Sale of government bonds in the overseas market would mark a big step towards opening up of Indias capital account. Analysts say the move would be beneficial to the nation even as it is also fraught with macroeconomic risks.
The proposal (to sell sovereign bonds abroad) is in the form of a debate being raised within the finance ministry, a senior official said,asking not to be named. No decision has been taken on it as yet but we have said that such a bond issue can be considered. It has been put forth in the FRBM (Fiscal Responsibility and Budget Management) statement for the first time perhaps, the official said. Since the proportion of external debt used to finance the countrys fiscal deficit has fallen over the years,the ministry feels overseas bond sale can be considered to bridge the deficit. External debt as a proportion to overall government debt has declined consistently from 10 per cent in 2005-06 to 7.9 per cent in 2010-11. The fiscal deficit has been estimated at 5.9 per cent in 2011-12 and at 5.1 per cent in 2012-13. The government is borrowing Rs 5.7 lakh crore in 2012-13 to finance the deficit,93.3 per cent of which will be financed domestically.
Para 42 of the Fiscal Policy Strategy Statement,tabled along with the Budget papers by Mukherjee in Parliament on March 16,says the government can explore selling its bonds abroad. With a gradual decline in net inflow 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, says the strategy statement.
This would help maintain a reasonable mix of domestic and external debt in its portfolio,it said. The finance ministry has been opening up the government securities (G-sec) market to foreign investors,with foreign institutional investors or FIIs now allowed to buy up to $15 billion of G-sec papers and $45 billion of corporate bonds. Active participation by foreign investors is expected to bring in global trading strategies in the local G-sec market and impart liquidity in this segment.