Analysing India's suitability in issuing external sovereign bonds based on international experiences

Abstract

The finance minister of India in her budget speech for the year 2019-20 announced India’s intent to issue sovereign bond denominated in foreign currency. This caused an intense debate among economists and policymakers in respect of whether India should go ahead with such a move or not. The purpose of this study was to add a more nuanced perspective to this debate by analysing the underlying trade-offs. To start with, this study looked at India’s history of issuing foreign currency denominated bonds. It found that India has not issued any external sovereign bonds in the past. Next, the reasons for India’s historic reluctance were analysed and it was found that exchange rate risk and the risk of markets could have been the driving factors in this regard. The paper then examined India’s macroeconomic fundamentals to assess its readiness for external bond issuance and found that the fundamentals are quite good currently. However, fiscal deficit and Debt to GDP ratio can be potential sources of concern. This was followed by an analysis of the global macroeconomic environment where it was found that on the international front too, India had strong reasons to issue external sovereign bonds because most advanced economies are characterised by loose monetary policy and low yields which have made the investors esperate for positive returns. The paper then analysed the potential risks and posited that the most significant risk for India would be the risk of addiction to external bonds on account of enticingly low borrowing costs. This was followed by an examination of the case study of China which has been hugely successful in sovereign bond issuances in the last three years. This success can be attributed to robust macroeconomic fundamentals of China and to nvestors’ urge to obtain positive yields.