INSUBCONTINENT EXCLUSIVE:
Sovereign bonds, also called government securities, are debt instruments issued by a government to raise long-term funds with repayment
obligations spread over years or in cases decades at a floating interest rate
ET explains the significance of the move, how the yield pricing mechanism would work and why it has led to criticism from experts.
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external debtto-GDP ratio is among the lowest globally at less than 5 per cent
The fact that the foreign debt was already low, added with factors such as cheaper interest rates on global currencies such as yen and
dollar may have prompted the government to go for overseas sovereign bonds
Additionally, such a move may also bolster private investments which have also witnessed a slowdown since the first half of previous fiscal
Sitharaman said during her budget speech
As per market estimates, the government is planning to borrow 10 per cent to 15 per cent of its needs from overseas which works up to just
How are yields on sovereign bonds determined?
The bond yields are determined by three factors: the creditworthiness or the ability of the
issuing country to repay its obligations, the country risk marked by ongoing internal or external conflicts and the fluctuations in exchange
rates in terms of the issuing currency.
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percentage points) over the US 10-year yields
However, being the first such issuance by the country and given better external sector indicators, the spread on the yields may come at
In other words, the borrowing cost would be around 3.2 per cent with an additional 3.5 per cent to 4 per cent cost for currency depreciation
What are the risks?
The announcement resulted in criticism from various industry commentators
Some believe that the depreciation cost of rupee may be too high and may cause the country to pay way more than it borrowed and eventually
default as happened with Mexico in the 1970s and 80s.
Others believe that the continuous flows to the foreign exchange kitty would make it
difficult for countryto control its import and export rates
Raghuram Rajan in an op-ed piece for this publication