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Landmark Moment – India Likely to Release its First Sovereign Bonds

Indian Sovereign Bonds to be issued

Recently, Chief Economic Advisor (CEA) of India Krishnamurthy Subramanian said that it is the right opportunity for the country to raise funds through overseas sovereign bonds at a much cheaper rate compared with those in the domestic market.

Apart from the CEA’s viewpoint, an announcement by Finance Minister Nirmala Sitharaman in her Budget 2019 speech was also that “India’s sovereign external debt to GDP is among the lowest globally at less than 5%. The Government would start raising a part of its gross borrowing programme in external markets in external currencies.”

These events have led to a discussion on Indian Sovereign Bonds, an idea that was discussed earlier too but was never implemented. Finance Secretary of India, as reported by Mint has said that India may float its sovereign bonds in the second half of the year 2019-20.

It is for the first time that the government of India seems to be thinking about issuing its own sovereign bonds. Before we get into details, let’s first discuss what a sovereign bond is.

Sovereign Bond

Sovereign debt is a debt issued by the national government generally in a foreign currency in order to raise funds or to finance the country’s fiscal deficit or to fund development projects. The stability of the government of the issuing country and confidence in the currency among others are some of the parameters which can be considered by an investor before buying the bonds. Countries with high-credit-worthiness will pay less interest on such bonds whereas countries with low-credit-worthiness will pay high interest.

This is why it is being said that India is in the right zone to issue the sovereign bonds now after five years of a stable and strong government, followed by an even bigger mandate for the incumbent.

As also stated by the Finance Minister, India’s sovereign debt as a percentage of GDP is 4.3% in 2018 (Provisional), among the lowest globally. India’s total external debt as a percentage of GDP also stands at 20.5%, most of which comprises of long-term debt and by non-government entities. Thus, the pressure on the government of India is less. This gives India leeway to raise more funds from the overseas market than the domestic market. Take a look at the below table.

Source: RBI

Further, 93.8% of total Central Government debt at the end of March 2018 was denominated in Indian currency. The larger part of the debt in Indian currency shows the lesser potential risk of government’s default.

Sovereign Bond – A new route for government

Denomination of bonds in external currencies (say US Dollars) will make them attractive to external investors as they will not then be worried about the currency risk as debt will be paid back in their own currency (US Dollars), eliminating the risk of exchange rate variations.

The Sovereign Bonds by India are in tune with Modi government’s policy of moving towards long-term debt than short-term debt or in other words, increasing the maturity profile of the securities. The weighted average maturity of outstanding stock of dated securities has increased from 9.6 years in 2009-10 to 10.6 in 2018-19.

Source: Status Paper on Government Debt, 2018-19

The above table shows how Modi government, in general, has been increasing the share of longer term dated securities (10-20 years, 20 years and above) in the total ‘Outstanding Dated Central Government Securities’, suggesting lengthening of the maturity profile of securities.

It, therefore, seems that the government of India is seriously considering going for Sovereign Bonds to raise funds from outside.