If, as reported, this government issues its first overseas debt in today?s global market conditions, it would be both bold and smart. Yes, markets are still jittery. But consider the fact that the credibility of government has never been higher recently than now. The sea of junk bonds afloat in the world market would make a GoI paper seem like a sought after landfall. In more confident times for the market, the load of deficit and the percentage of public debt India?s Budget carries would have been dampeners. A year down the line, when markets are more stable and other countries get their act together, competition will be stiffer. Given low rates for competing instruments, the lack of good quality paper and the huge amount of cash looking for those elusive investment avenues in global markets, the attraction for Indian debt could be strong. On the other hand, some may make the argument that GoI paper abroad should be pushed only by the next elected government, which will have more ?legitimacy? and more need, given the demands of a slowdown on the public purse. But that, around July 2009, may not be the time offering the advantages present now.
The bigger issues connected with such a move include the role of state governments. The finance ministry has mandated the 13th Finance Commission to work on this. A big GoI paper issue abroad will push the development of the bond market and the maturing of the rupee as an international currency. The evolution of an arbitrage-free rupee yield curve will allow Indian firms to get better pricing on their overseas borrowings. Investment banks have long complained that the lack of a rupee-denominated yield curve has made global marketing of sub-national debt paper from India more costly. A yield curve represents the relation between interest rates, at a given point in time, and bonds of different maturity. Bonds of higher maturities generally carry higher interest rates. For all politicians keen on government spending, the importance of a yield curve should be obvious. Sadly, bond market development still doesn?t get political traction.