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India's $10 billion sovereign bond ambition

India plans to raise $10 billion this year through sovereign bonds, the first time ever. However, experts say this could lead to foreign exchange risks

Manu Balachandran
Published: Jul 17, 2019 09:16:04 AM IST
Updated: Jul 17, 2019 09:18:24 AM IST

India's  billion sovereign bond ambitionImage: Shutterstock

India plans to raise $10 billion this year through sovereign bonds, the first time ever. In her budget speech, Finance Minister Nirmala Sitharaman announced India’s plans to borrow from external markets. “India’s sovereign external debt to GDP is among the lowest globally, at less than 5 percent,” she said. “The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have a beneficial impact on demand situation for the government securities in the domestic market.”

Two days later, India’s finance secretary said sovereign bonds could be worth $10 billion or between 10 percent and 15 percent of all the borrowings. In all, India plans to borrow ₹7.1 lakh crore this year. At the end of March 2019, India’s total sovereign debt stood at $103.8 billion, or 3.8 percent of the GDP.

India needs to fund domestic projects and the macroeconomic fundamentals are strong, especially on the back of a fast growing economy in a slow global market, it makes sense to borrow from global markets.

“Yields in the global markets are quite low,” says Pravakar Sahoo, a professor at the Institute of Economic Growth, Delhi University. “Investors are now looking at options where the yield is on the higher side, and India’s sovereign bonds can offer that. In addition, the Indian economy’s fundamentals remain quite strong, making the bonds quite attractive.”

The government is likely to choose foreign currency denominated compared to rupee denominated one. “That’s because a lot of US-based mutual funds aren’t allowed to take currency risks… it also helps to make the bonds attractive,” says Apoorva Javadekar, assistant professor of finance at the Indian School of Business.

“Issuing dollar denominated sovereign bonds in the global market would help create a pricing reference for Indian corporates,” adds Javadekar. “But at the same time, foreign placement of Indian government bonds also risks crowding-out of the Indian corporates from the external debt market.”

Sovereign bonds also carry some serious foreign exchange risk. “We are now allowing a close scrutiny of our finances to the global market,” says Sahoo. “That means we have to be more disciplined.”

(This story appears in the 02 August, 2019 issue of Forbes India. To visit our Archives, click here.)