Sovereign Bonds: Boon or Bane?

The government proposed the issuance of an offshore sovereign bond in the Union Budget for 2019–20 on 5 July 2019. A sovereign bond is a bond issued by the federal government of a country with guaranteed periodic interest payments, also known as coupon payments, and repayment of the principal amount on the maturity date. In other words, it means that the government would borrow by raising a loan in the international market in foreign currencies. The government plans to borrow around $10 billion, which is about 10%–15% of the total borrowing offshore.

The investors who subscribe to such sovereign bonds include large global banks and a few countries. The rationale being put forth for the raising of such offshore sovereign bonds is that India’s total sovereign debt-to-GDP (gross domestic product) ratio is less than 5%, and it would have a favourable impact on the demand for government securities in the domestic market. The total sovereign debt at the end of the financial year 2018–19 was $103.8 billion, which was 3.8% of the GDP. Those in favour of issuance of such bonds argue that it would free up resources for domestic savings and production, and help establish a fair market price for Indian debt. It would establish a credit default swap (CDS) market that would aid in efficient price discovery. In addition, it would allow raising of cheap money abroad given that the bond yields in the international market are currently low. It would also attract substantial inflows into the local debt market from global investors.