InvestorQ : Do you think that India should go ahead and launch a sovereign bond issue? Why has India been shying away from doing so?
Aditi Sharma made post

Do you think that India should go ahead and launch a sovereign bond issue? Why has India been shying away from doing so?

Answer
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Aashna Tripathi answered.
9 months ago


Indian government has been wary of taking on uncertain currency risk in the books of the government. However, it must be remembered that India is currently in a sweet spot for a sovereign bond issue. Here are a few genuine reasons that could justify India going for a sovereign bond issue. The fact is that India can afford to take that risk.

· India’s fiscal deficit has been well within the 4% mark, even if you consider the off balance sheet liabilities in the nature of food subsidies and oil subsidies. That is very reasonable if India can sustain annual growth above 7%.

· RBI now has a forex reserve chest of $463 billion and barring year 2018, the FPI flows have been fairly robust into India. This should more or less compensate for any currency risk that the government would run.

· In the current year, the RBI has paid a record dividend of Rs.123,000 crore (apart from returning capital of Rs.53,000 crore) to the government. Any RBI dividend is effective monetization of deficit and can be inflationary. Comparatively, sovereign bonds would be a transparent way of bridging the funding gap.

· Indian government has always avoided sovereign bonds due to the inherent risks. With the comfortable forex situation and robust flows via FPI and FDI, the time is ripe to seriously consider sovereign bonds issue.