Subbarao opposes sovereign bond issue now as ‘costs outweigh benefits’

While the government is toying with the idea of coming out with a sovereign bond issue

Written by ENS Economic Bureau | Mumbai | Published: July 31, 2013 1:50:52 am

While the government is toying with the idea of coming out with a sovereign bond issue to shore up the country’s 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 government’s 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? It’s not clear. If people factor in the exchange rate variation,in the RBI’s 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 Governor’s comments,SBI chairman Pratip Chaudhuri said,“Of course… I am opposed to an NRI bond. It won’t work. You can’t 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.

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