The Percy Mistry and Raghuram Rajan committees on financial sector reforms have a treasure trove of ideas on how to reinvigorate finance in India. A forward-looking section of the government has been trying to implement them in the teeth of opposition. A recent decision by the finance ministry to ask the 13th Finance Commission to work on some contours of a future policy on the trading of sovereign rupee bonds in international markets can be interpreted as a baby step in the direction of liberal finance. If implemented, the floating of sovereign rupee bonds will add more substance to the proposed independent debt management office, work on which is going on. We have consistently, in these columns, supported the setting up of a DMO independent of RBI; there?s plainly a conflict of interest in RBI performing this function. The move to involve the Finance Commission, mandated to advise on Centre-state fiscal relations, is interesting and welcome?the trading of the debt paper of states in India and abroad will also come to the fore.
That?s not where benefits end. If India wants to be a real player in the world of international finance, and be counted as an economy that matters, there will be the obvious need for the rupee to be seen and counted as a global reserve currency. The trading of rupee-denominated bonds will give us a foot in the door. Also, global trading in its bonds will help obtain a rupee yield curve?this can then be pitched to foreign investors. An arbitrage-free rupee yield curve will also help Indian firms borrowing abroad, particularly SMEs, get a better price. The yield curve will differentiate between short-term and long-term interest rates and bonds with a short maturity and long maturity. Currently, in the domestic market, there is very little differential between longer- and shorter-term paper. It is important to note that this policy move will be completely different from one-time marketing of debt paper as in the case of the India Millennium Deposits, or Resurgent India Bonds, which were purely meant to raise capital. Underlying the current move is a bigger ambition?a seat for India at the table of global high finance.