Sovereign Strength

Updated: Jul 27 2013, 10:07am hrs
As the debate is intensifying on the need for a sovereign bond issue to stabilise the rupee, the country's debt position is under the scanner of global investors. Indian bond market is passing through a turbulent phase following apprehensions of unwinding of easy money policies in the advanced nations and after RBI squeezed liquidity to arrest the rupee fall. Although the cost of borrowing has gone up in the short-term, data shows the country has fared well in reducing its debt burden even after the Lehman and EU crisis. While the debt:GDP of advanced nations increased sharply from 81% in 2007 to 110% in 2012, India has reduced the government debt burden from 73% to 67% as per IMF data. India needs to cut its debt:GDP ratio further as it is still higher as compared with major EMEs such as China and Russia. Over the years, prudent debt management by the RBI has ensured the weighted average coupon on government bonds are falling while maturity period remains within 10 years. The debt sustainability has improved as the interest cost as a share of both revenue receipts and GDP is falling. If the government sticks to the fiscal consolidation path, the centre's debt:GDP will sharply fall to 42.3% by FY16 from 45.7% estimated for FY14. States have also shown grit in reducing their debt burden. What's important, the non-resident holding of Indian government debt is lower at 6.7% of the total debt as compared to that for Brazil (17.6%), Russia (19.4%) and South Africa (32%). One of the main factors in the downfall of PIIGS was higher foreign exposure in government debt, which was still over 60% for Greece, Ireland and Portugal, 35% for Italy and 29% for Spain in 2012. Lower foreign holding in Indian government debt adds to the sovereign's strength.