On top of these, the government will also have to decide if the overseas borrowing will be an annual feature or such securities will be issued only occasionally when there is a pressing need for it.
The government is unlikely to announce details of its overseas sovereign bond sale plan in a month, as was expected after the Budget, as it’s yet to work out several operational aspects, including the size and tenure of such securities. On top of these, the government will also have to decide if the overseas borrowing will be an annual feature or such securities will be issued only occasionally when there is a pressing need for it.
The earlier plan (under former finance secretary Subhash Chandra Garg) of issuing bonds up to $10 billion and preferably in tranches to test investor appetite was tentative and just at a discussion stage, a source explained, indicating that that plan has now been shelved.
“The plan will be finalised only after assessing every important detail and potential macro-economic impact,” the source said. “The government and the Reserve Bank of India will remain engaged on this issue as and when the need arises,” the source added.
A decision on various operational aspects, including whether the securities will be issued in tranches or in one go, will have to be made, the source said. The government has to decide if the bond issue will be confined to just one foreign currency or be diversified and whether it needs to hedge the risks.
The offshore bond issue is also expected to feature in the meeting of the RBI’s central board on August 16. New economic affairs secretary Atanu Chakraborty has replaced Garg (who has now been shifted to the power ministry) on the RBI board. The government budgeted its FY20 gross market borrowing at Rs 7.10 lakh crore and roughly a 10th of it was earlier expected to come through the overseas bond issuance.
Amid apprehensions that any sharp depreciation of the rupee will potentially raise the cost of borrowing from overseas in times of redemption even if the interest rates are low, the government will have to analyse the impact of the domestic currency fluctuations. More importantly, the Centre will gauge if its overseas borrowing move will indeed ease pressure on the domestic bond market and resolve the problem of crowding out private sector borrowers.
Given the criticism of the move by several experts (former RBI governor Raghuram Rajan has cautioned against its temptation and even PMEAC member Rathin Roy has sought a white paper on the issue), the new DEA secretary will have to carefully assess every relevant detail.
Swadeshi Jagaran Manch (SJM), an affiliate of the RSS, has vehemently opposed the idea of selling the bonds in foreign currency. The Prime Minister’s Office has reportedly asked the finance ministry to weigh risks and rewards of any such bond sale plan carefully before going for it.
A recent Bloomberg survey of foreign and local investors said the issuance of sovereign notes by India could price at a yield premium of about 90 basis points to 130 points over US Treasuries. That’s in line with sales by countries with similar credit ratings such as Indonesia. The US 10-year Treasuries are yielding around 2%.