Top Ex-Central Bankers Oppose India Plan for Overseas Bond Sale
(Bloomberg) -- Three former Indian central bank officials have opposed the government’s plan to sell sovereign bonds in the overseas market.
The time’s not ideal for such an issuance because India runs quite a large budget deficit, according to an ex-governor and two deputies of the Reserve Bank of India. Moreover the country, due to its current-account shortfall, may want to avoid risks tied to currency fluctuations, one of them said.
The government’s proposal is a “dangerous move,” Rakesh Mohan, a former RBI deputy governor, told CNBC-TV18. India’s “actual” fiscal deficit is about 6%-7% and one of the highest in the world, he said, but “we have been able to live with this for a long time with financial stability as we have not been doing external sovereign borrowing.”
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Finance Minister Nirmala Sitharaman announced the plan in her budget speech on Friday, the first time an Indian government has officially announced the intent for a global bond sale. State Bank of India, widely regarded as a proxy for the government in the debt markets, issued a five-year note at a 185 basis-point premium to the yield on U.S. Treasuries earlier this year.
The yield on any Indian issuance will ensure the bonds are lapped up by global investors, according to Lin Jing Leong, an investment manager at Aberdeen Asset Management Asia Ltd. The country’s foreign exchange reserves are at a record high of more than $426 billion.
“India has traditionally been conservative about borrowing externally and this means it has space to venture into foreign capital markets,” Leong said. “We will be keen to see India remaining cautious and establishing some parameters around external borrowing to ensure that they avoid the addiction in foreign capital many emerging markets succumb to.”
India will “soon” start selling bonds overseas, though the amount hasn’t been decided, Finance Secretary S.C. Garg told reporters Friday. The local market cheered the decision, with the yield on the benchmark 10-year sovereign bond falling to the lowest since 2017.
Foreign currency borrowing will mean exchange-rate risk being borne by the nation, former RBI Governor C. Rangarajan told BloombergQuint, expressing doubts over such a move. H.R. Khan, a former RBI deputy governor who oversaw the debt markets, said the decision risks adding to volatility in the domestic bond market.
India is rated at the lowest investment grade by Fitch Ratings and S&P Global Ratings, while Moody’s Investors Service in 2017 upgraded the sovereign to a notch higher.
“The decision of the sovereign to borrow overseas could have been delayed,” Khan said by phone. “We are a fiscal-deficit country and our banking sector is still under stress.”
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