India is moving forward with an international bond offering.
India will be the last in the G20 group of countries to access global debt markets when it launches its first foreign bond sale worth $10 billion. The bond is expected to be issued in the autumn and marks a fundamental shift in Indian government borrowing, which is pegged at $104 billion in the current fiscal year ending March 31, 2020.
Most Indian government borrowings are usually offered on the domestic market, and in the local currency. However, finance ministry officials divulged that the sovereign bond could be in more than one tranche and in multiple currencies, including US dollars and Japanese yen. The bond will be launched simultaneously at financial centers in London, Singapore, Hong Kong and New York. The tenure and coupon rate have yet to be finalized.
The issuance formed part of the federal budget, which was presented to parliament on July 5 by Finance Minister Nirmala Sitharaman.
The Narendra Modi–led government is looking to leverage the country’s extremely low sovereign external debt-to-GDP ratio at 5% to mobilize low-cost funds to partially finance the fiscal deficit.
However, former governors of the Reserve Bank of India (RBI), Raghuram Rajan and Duvvuri Subbarao, have opposed the move to tap international debt markets to meet government spending needs. They cited Argentina and Turkey’s not-so-positive experiences of bond issuance to finance their country’s debt. “It could be an addiction, difficult to get out of, and make India vulnerable to foreign exchange rate volatility,” they cautioned.
Rajan instead advocated lifting foreign investment caps in rupee-denominated government debt paper, as sovereign bonds “were fraught with risks and no real benefits.”
However, Finance Minister Sitharaman has ruled out a “rethink” on the sovereign bond, which is expected to take the pressure off the domestic rupee market and create space for private borrowers. She sees an opportunity to cut interest costs in India’s $2.6 trillion economy, which has slowed in the past five years. The issue may also set a price reference point for large Indian corporates hoping to tap international debt markets.
Indian companies have had a successful run in global markets with Masala bonds, denominated in rupees and sold to foreign institutions with an appetite for the country’s debt paper.
As of March 31, 2019, India’s total external debt stood at $543 billion, according to Reserve Bank of India estimates. The external debt-to-GDP ratio was 19.7%. Approximately 38% of the country’s debt consists of commercial borrowings by private enterprises; 24% is nonresident Indian deposits with banks; and 18.9% is short-term trade credit, with the government’s share being minimal.