A U.S. one-hundred dollar banknote and Indian ten rupee banknotes are arranged for a photograph (Photographer: Dhiraj Singh/Bloomberg)

Indian Government Toys With The Idea Of A Sovereign Dollar Bond

The Indian government is once again toying with the idea of a sovereign dollar bond issue.

The government has sought views from foreign banks and bond arrangers on the modalities of such a bond issue, said two people familiar with the matter, who spoke on the condition of anonymity. The initial information has been sought by finance ministry staffers and no firm decision to issue a dollar bond has been communicated to arrangers, they said. A government official also confirmed that a dollar bond issue is being mulled.

If market conditions are seen as conducive, the government could consider a bond issue in the $4-5 billion range, said one of the two people quoted above.

An email sent to the finance ministry spokesperson was not immediately answered. Earlier in the day, spokesperson DS Malik, in a statement to Bloomberg News, denied any plans to issue a sovereign dollar bond.

The Indian government has toyed with the idea of issuing sovereign dollar bonds in the past too, but has eventually decided against it. The option had been considered in 2013, when the Indian rupee was under pressure. However, it was thought that issuing a sovereign dollar bond at a time when India had wide fiscal and current account deficits was imprudent. Instead, the Reserve Bank of India announced a scheme to incentivise foreign currency non-resident (FCNR) deposits, which brought in nearly $34 billion.

Macroeconomic conditions in India are more stable now than in 2013. In 2017-18, the Indian government is expected to maintain a fiscal deficit of 3.5 percent. The current account deficit for the year is seen at 1.8 percent of GDP in 2017-18, according to an estimate by ratings agency ICRA. India is also sitting on record high forex reserves of $428 billion.

While an Indian sovereign bond may see good demand, the issue will be liquidity, said one of the two people quoted above. This person explained that it would be better for the government to lay out a roadmap under which it issues a certain amount in sovereign dollar bonds each year to assure foreign investors of adequate liquidity.

India currently has no sovereign dollar bonds outstanding and most of its debt is rupee-denominated. The share of government debt in total external debt is also low. India’s sovereign external debt stood at $108.9 billion at end-December 2017, showed the government’s external debt report issued at the of March. The share of government debt in total external debt stood at 21.2 percent at end-December 2017. Much of this is from multi-lateral agencies and, hence, not subject to interest rate volatility.