While the government is toying with the idea of coming out with a sovereign bond issue to shore up the countrys foreign exchange reserves and strengthen the rupee,the Reserve Bank of India (RBI) has expressed reservations on the plan.
RBI Governor D Subbarao,on Tuesday,made it clear that the country will have to pay a price as costs outweigh benefits in the current situation. Is the sovereign bond appropriate? We have reservations about that. We have done a cost-benefit analysis of the sovereign bond issue. There are perceived benefits like it will buffer your reserves,it will lower your interest rates,it will establish a benchmark for government borrowing and broaden the investor base, Subbarao said while unveiling the monetary policy here.
Those are standard arguments of a sovereign bond issue but there are costs. It will compromise our financial stability. There is a lot of value to be attached to governments borrowing in domestic markets. We have learnt those in the 2008 crisis… we are learning those lessons now. Will we really get a lower interest rate because of a sovereign bond issue? Its not clear. If people factor in the exchange rate variation,in the RBIs view,the cost of a sovereign bond issue,especially in the current juncture,outweigh the benefits, he warned.
We should be doing a sovereign bond issue,if at all,from a position of strength,when we are much less vulnerable than at this time, Subbarao said.
Agreeing to the RBI Governors comments,SBI chairman Pratip Chaudhuri said,Of course… I am opposed to an NRI bond. It wont work. You cant go to the US and say I will give a bond to this person and not to that person. It has to be a universal offering. We are facing a whole lot of class action suits from our previous bond offerings.
Investment bankers say India can mop up $20 billion by re-issuing 7-9 per cent 5-year forex-denominated NRI deposits,with the rupee risk being borne by the RBI or the government a la 1998 Resurgent India Bonds or 2001 India Millennium Deposits.