For the first time ever, the government has considered to raise part of its gross borrowing from the overseas market in foreign currency – an indication that India is getting ready to gradually expose its bond market to the euphoria and uncertainties of overseas investors.
Dealers and market experts believe there will be a huge demand for the Indian government’s foreign currency denominated-bonds, if issued.
Finance secretary SC Garg said the first issuance will take time. “If we can raise 10-15% of our borrowing programme by way of sovereign bonds, it will not be a serious addition to our foreign liabilities. It may take three to five months to do the first tranche,” he said.
The idea of raising part of the government borrowing abroad has been debated and discussed over many years amongst regulators, bankers and multiple governments. However, former RBI governors are believed to have expressed their concerns regarding the idea.
So far, the government has only stayed within the border for its market borrowing needs, tapping the domestic bond market that has banks, mutual funds, etc, making necessary contributions.
Ananth Narayan, professor of finance at SPJIMR, said India is amongst the few major countries to have never issued a sovereign bond. “These issuances will draw in foreign savings at a good rate for the country and will free up domestic savings to be channeled into productive private investments. This will also establish a benchmark that would help price discovery for other corporates tapping overseas credit markets.
Finally, sovereign bonds would also help instill policy discipline, given hard-nosed overseas investors would be holding the bonds,” he said. As far as the pricing of these bonds is concerned, experts believe these securities could be sold at a cost that could be way lower than what it takes to issue SBI’s dollar bonds.
However, there is a flip side to the decision as well. By borrowing abroad, the bond market is likely to receive “hot money” as investments, something that could go out at the earliest signs of trouble. This outflow can lead to volatility and impact the domestic borrowing costs.
Gopikrishnan MS, independent market expert, said that foreign players will start trading credit default swap (CDS) on the Indian government bonds. “Usually, the CDS spread may not exactly reflect the underlying security’s spread.
If for some reason, this market over-reacts negatively, it may increase the incremental borrowing cost, not only for the government but also for companies and banks. In bad times, it may give an inaccurate picture of the fundamentals,” he said.
Source: financialexpress.com