 "Govt looks at regular issues of sovereign bonds")
Also, it might issue such bonds at regular intervals. Before taking a decision, it would wait to see the impact of various measures by the Reserve Bank of India (RBI), as well as developments in the US.
Ministry officials said NRI bonds might not be considered, as that would merely lead to shifting funds from fixed deposits by NRIs in banks, known as foreign currency non-resident accounts, to sovereign bonds. Now, the choice is between a sovereign bond directly issued by the government and a quasi-sovereign bond issued through a public sector bank, with government backing.
Experts said though NRI bonds had a risk of money being shifted from bank accounts to bonds, these promised more stable funds. “While global bonds may offer you a far bigger market, NRI bonds may have a better success rate because of the affinity of NRIs with India. NRIs and sovereign wealth funds are stickier investors compared to global investors of sovereign bonds,” said Abizer Diwanji, partner, EY.
Instead of a one-time issue, the government might look at regular issues of debt in dollars, as a single issue might not help secure more than Rs 20,000 crore.
A decision on this would be taken after considering the country’s long-term requirements. The bonds could be issued at intervals of a month, a quarter, six months or a year.
“We are not looking at sovereign bonds only for financing the current account deficit . We cannot take a decision in haste based on the current situation, as things might change tomorrow. RBI measures to squeeze liquidity may start showings results and the rupee may strengthen,” said a finance ministry official, on condition of anonymity.
In recent days, RBI has taken a number of steps to strengthen the rupee by increasing demand for the currency. Officials, however, say these measures would only address short-term issues. Though sovereign bonds could be a long-term answer, there is concern about increasing the external debt burden and exposing the country to foreign exchange risks during repayment.
The government is split on the need for sovereign bonds. The bankers Chief Economic Advisor Raghuram Rajan recently consulted were also divided. It is being debated whether a sovereign bond should be issued through public sector banks such as the State Bank of India (SBI), as was the case in the past, or directly by the government. Apparently, SBI isn’t keen on the public sector bank route; RBI, too, has reservations.
“There should be an incentive for the bank to do it. If banks are asked to do it, the government would take the risk of currency rate fluctuation. That is what it did the last time, too, but luckily, the rupee appreciated at that time,” said an official.
Another issue is under the Fiscal Responsibility and Budget Management Act, the government has limited space to guarantee these bonds by banks.
In the past, the government neither issued a sovereign bond directly, nor did it opt for regular issues. In 1991, India Development Bond was a quasi-sovereign bond, while the Resurgent India Bond in 1998 and the Millennium India Deposit in 2000 were NRI bonds. All these were one-time issuances. Through these bonds, banks had raised $1.6 billion, $4.8 billion and $5.5 billion, respectively.
The official said to address the high CAD and the weakening rupee, the ministry was considering other options, too, though those were limited and would be exhausted soon. “We will see how the first quarter CAD numbers looks are…If the situation was so bad, a decision on going for a sovereign bond would have been taken by now,” he added.
These bonds will also help finance high current account deficit (CAD) amid dwindling capital flows. In 2012-13, CAD hit a record high of 4.8 per cent of GDP. Rupee has depreciated by over 12 per cent against the dollar since the beginning of this financial year. It hit an all-time low of 61.21 a dollar on July 8, forcing the Reserve Bank of India and the Securities & Exchange Board of India to step in.
Foreign brokerage Bank of America Merill Lynch has said unless the government raises NRI or sovereign bonds, the rupee might breach the level of 65 in 2014, as it can at most sell $30 billion in defence.