Offshore sovereign bond plan under review amid calls for caution

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Updated: July 27, 2019 7:11:48 AM

New DEA secretary set to re-examine proposal, hold talks with RBI and brief PMO

Atanu Chakraborty, finance ministry, department of economic affairs, Subhash Chandra Garg, foreign investors, offshore sovereign bondsAtanu Chakraborty

The finance ministry’s department of economic affairs (DEA) under new secretary Atanu Chakraborty will likely review the maiden offshore sovereign bond sale plan and examine the pros and cons of it, but the proposal hasn’t been shelved yet despite concerns expressed in some quarters, sources told FE.

Under former finance secretary Subhash Chandra Garg, the DEA was in favour of issuing offshore sovereign bonds in tranches this fiscal — up to $2 billion in the first tranche — to test the appetite of foreign investors, one of the sources said. “Issuing the entire $10 billion in one go was considered risky, mainly due to the fact that it was never tested. Now, the new secretary will examine all the details and reach a decision after discussing with the RBI. The Prime Minister’s Office (PMO) will be briefed again.” Another source added: “Even if the government has to shelve the plan, it will do so only after a thorough review and not in haste, given the sensitivity attached to Budget announcements.”

The PMO is learnt to have wanted a review of the plan, amid growing speculations that it was not adequately briefed by the DEA earlier on associated risks, although the advantages of any such offshore bond issue was duly highlighted.

Also read: What went wrong with Modi govt’s sovereign bond plan

Garg, who took charge as the power secretary on Friday, said the sovereign bond issue was to ease pressure on domestic availability of resources. “Especially the private sector has enormous benefits (from the proposal), and risks are lower,” he said. When asked whether sections of the government were opposed to issuance of sovereign bond/s abroad, Garg said, “During the time until I was there, I hadn’t heard anyone in the government questioning the government.”

The government has budgeted its FY20 gross market borrowing at Rs 7.10 lakh crore, and roughly a tenth of it was expected to come though the overseas bond issuance.

After the Budget, sources had said these sovereign papers could be issued only after the government firmed up its borrowing calendar for the second half of FY20 in the last week of September. But the broad contours of the plan were to be firmed up in 2-3 weeks, following the finance ministry’s detailed discussions with the central bank.
However, 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 reassess the plan. Even Swadeshi Jagaran Manch (SJM), an affiliate of the RSS, has vehemently opposed the idea of selling the bonds in foreign currency.

Amid growing opposition to the offshore issue and Garg’s departure from the finance ministry, the yield on the benchmark 10-year bonds inched up 12 basis points on Thursday to 6.55%, before closing at 6.51%. This is because analysts started to factor in greater borrowing by the government in the domestic market.

According to a Bloomberg survey of foreign and local investors, the issuance of sovereign notes by Asia’s third-biggest economy is expected to 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%.

According to the FY20 Budget announcement, the move “will also have beneficial impact on demand situation for the government securities in domestic market.”

India’s offshore bond plan follows a number of similar sovereign issuances by emerging market economies this year. Indonesia sold 3.4% bonds due 2029 at 130.50 basis points over Treasuries in June, while the Philippines issued 10-year notes at 110 basis points in January. Russia sold 2029 dollar bonds at a 3.95% yield, and Saudi Arabia issued two billion euros of bonds due in 2039 at 140 basis points over mid-swaps, according to Bloomberg.

However, analysts caution that in the event of a depreciation of the rupee in the coming years, even if the cost of borrowing is much cheaper, the government would end up bearing the potential high costs of devaluation upon repayment in foreign currency.

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