The finance ministry’s position on sovereign bonds seem to have changed since the height of the current account deficit crisis last summer. With a gaping current account deficit (CAD) of over $88.2 billion in FY13, sovereign bonds seemed as a good idea to raise low cost funds abroad.
Considered for the first time in over 12 years, it also created excitement in domestic markets and analysts estimated it could raise as much as $20 billion. Though the Reserve Bank of India cautioned against such an issuance, arguing that it would compromise the country’s financial stability, the finance ministry had said it was an option being considered.
The crisis may have abated since, but sovereign bonds have found a mention in the Interim Budget given that with declining inflows from multilateral institutions, some quarters believe there must be a reasonable mix of domestic and external debt in the government portfolio.
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Documents tabled in Parliament on Monday as part of the Interim Budget 2014-15, reveal that North Block believes that the decision to issue rupee-denominated sovereign bonds must not be based on the relative cost alone such as the low interest rate offered in international markets.
Instead, factors including domestic savings and investment rate must also be examined before borrowing from the global financial markets. “The decision to issue sovereign bonds would require establishing a regular and predictable schedule of issuance leading to a build up of interest and redemption payments, keeping in view balance of payments implications,” said the statement on fiscal policy and strategy.
The finance ministry’s comments are interesting given that the share of external assistance have fallen significantly. The report on public debt management reveals that 96 per cent of the fiscal deficit was financed through market loans and just 8 per cent through external financing between April and December 2013.
In the Revised Estimates for FY14, net external assistance is expected to be just Rs 4,587.92 crore as against the Budget Estimate of Rs 7,739.99 crore. It is estimated to decline further to Rs 4,068 crore in FY15. Officials said these issues need more deliberation and discussion. Meanwhile, the Budget also mentioned setting up of a Public Debt Management Office soon. Clearly, it could help the finance ministry form a cohesive view on sovereign bonds.
Surabhi is a special correspondent based in New Delhi