InvestorQ : What are Sovereign Bonds in the Indian context and why is the PMO against the issue of Sovereign Bonds?
Aashna Tripathi made post

What are Sovereign Bonds in the Indian context and why is the PMO against the issue of Sovereign Bonds?

Answer
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Moii Chavate answered.
1 year ago


In the Union Budget 2019, the Finance Minister announced plans for issue of $10 billion of sovereign bonds. Sovereign bonds are dollar borrowings done the Indian government which have to be repaid typically in dollars. There was a reason for the same. By relying on foreign currency bonds, the government will hit two birds with one stone. It will ensure dollar inflow and help to protect the rupee and also reduce the pressure on the local bond markets. This will ensure that interest rates do not go through the roof and private borrowers will still be able to borrow at lower rates.

Let us understand that there is no official statement from the PMO but Reuters in its report had said that the PMO may have objected to the sovereign bond issue. The PMO acts like sounding board bring certain ideas into question. Apparently, the PMO has asked the Finance Ministry and the key bureaucrats to rethink the idea due to its larger currency implications. Since sovereign bonds are denominated in dollars there is the risk that any weakening of the rupee versus the dollar could increase the burden. Here are I am talking of dollar terms. This will not only impact the external ratings of India but also create a vicious cycle of rupee weakening. The main reasons why the PMO seems to have raised this point is that India already has huge debt burden due to dollar payments that we have to make for oil imports. Sovereign bonds could add to the burden.