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Offshore sovereign bonds: Govt weighing risks and rewards

Banikinkar Pattanayak

The government is far from finalising details of its offshore bond sale plan, as it is in the process of working out various operational aspects and weighing potential macroeconomic impact of the move, a source told FE.

While the finance ministry will discuss the proposal with the Reserve Bank of India (RBI) - the government's debt manager - and seek necessary inputs, any such plan, once finalised by the Centre, won't require the central bank's approval to be operational, the source explained.

The government has budgeted its FY20 gross market borrowing at Rs 7.1 lakh crore, and roughly one-tenth of it ($10 billion) is expected to come though the overseas bond issuance.

Asked about the operational aspects of the bond issuance plan, the source explained: "Should the bond issue be confined to just one foreign currency or be diversified? Should the bonds (worth $10 billion) be issued in one go or in tranches? Does the government need to hedge the risks or not? If it decides not to hedge, what risks should it expect? How much will it cost if the rupee depreciates too much over the next few years? Will the plan really address the issue of crowding out private sector borrowers? These issues and many more on potential impact on liquidity and the broader financial system need careful examination."

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 former finance secretary Subhash Chandra Garg (who has now been shifted to the power ministry) on the RBI board.

Uncertainties over the desirability of offshore bonds started to gather pace in recent weeks, especially after the transfer of Garg (who was an advocate of the move), although there was no plan yet to shelve it.

Earlier, a source had said under Garg, the Department of Economic Affairs (DEA) was in favour of issuing offshore bonds in tranches-up to $2 billion in the first tranche-to test the appetite of foreign investors. "Issuing the entire $10 billion in one go was considered risky, mainly due to the fact that it was never tested."

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. Even Swadeshi Jagaran Manch, an affiliate of the RSS, has vehemently opposed the idea of selling bonds in foreign currency.

A Bloomberg survey of foreign and local investors said the issuance of sovereign notes by India could price at a yield premium of about 90-130 basis 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 a beneficial impact on demand situation for government securities in the 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. Russia sold 2029 dollar bonds at a 3.95% yield, and Saudi Arabia issued 2 billion euro worth 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 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.