Finmin to ramp up quasi-sovereign bond issues to cushion against Fed tapering

The finance ministry wants to get its timing right for the proposed issue of quasi-sovereign bonds through three public sector firms to soften the impact of an expected announcement on stimulus tapering by the US Federal Reserve early next year.

?The rupee has recovered and stabilized, bond yields have improved and for now we are getting a lot of dollars in through the FCNR(B) window. So quasi-sovereigns were in the back-burner for a while, but now we will ramp it up so that we can get in more dollars by January,? a senior official told FE.

The idea is to get in as much foreign currency as possible to prevent a repeat of the July-August bloodbath, the official added.

In August, the finance ministry mandated India Infrastructure Finance (IIFCL) , Power Finance Corp (PFC) and Indian Railways Finance Corp (IRFC) to raise a total of $4 billion through quasi-sovereign bonds and asked banks and PSUs to raise NRI deposits and external commercial borrowings to help prop up the rupee and finance the current account deficit.

Emerging markets around the globe bled on fears of an imminent announcement by the US Fed on tapering its quantitative easing program. India was no exception as bond yields rose sharply and the rupee hit a lifetime low of 68.85 versus the dollar.

The announcement was delayed by the Fed and markets now expect an eventual clarity on the tapering in January or February 2014. Meanwhile, there was no move by the PSUs to issue quasi-sovereign bonds, till IRFC said that $600 million worth of the bonds will be issued December onwards.

Officials in the North Block said the timing (early next year) for these bond issues is deliberate.

India has so far received $25 billion through the FCNR(B) (Foreign Currency Non-Resident Banks) and the Tier-1 concessional swap windows. These facilities were announced by the RBI in August for the exact same purpose of getting in foreign currency to prop up the rupee and finance the CAD.

Another senior official said since August, the PSU’s have been working behind the scenes to draw up plans, work out roadshows and rope in bankers to help with the offerings.

?These things are time consuming. The PSUs have completed these formalities and are now ready to issue these bonds,? the second official said.

Officials said they hope the $4 billion worth of bonds would be issued before a tapering announcement by the Fed.

Quasi-sovereign bonds are bonds which are not directly issued by a government but do have the sovereign backing of a government. In India’s case, $1.5 billion worth of the bonds will be issued by IIFCL and PFC each, while $1 billion will be issued by IRFC to finance long-term infrastructure and increase dollar inflows.