The Reserve Bank of India (RBI) has opposed the issue of sovereign bonds to bridge a widening current account deficit (CAD) as the benefits of raising foreign exchange from such an instrument outweigh the costs. RBI Governor D Subbarao said that the central bank has done the cost-benefit analysis of the sovereign bond issue and made it clear that sovereign bond issue is not an appropriate option in the current circumstances as costs outweigh benefits. The country should issue sovereign bonds during its high growth phase and we are much vulnerable position right now, he added.
Citing the advantages of sovereign bonds, the RBI chief said that there are perceived benefits of sovereign bond issue as it will buffer reserves, lower interest rates, establish a benchmark for government borrowing and broaden the investor base. However, the high cost of this move would overcome all these benefits.
Earlier this month, the government had planned to come out with a sovereign bond issue to shore up the country’s foreign exchange reserves and strengthen the rupee, saying it was an option to tackle forex volatility. It is estimated that India can mop up $20 billion from NRI bonds. NRI bonds have helped the economy earlier, however the situation is a lot different now as the rupee has depreciated more than Rs 10 in this fiscal alone, languishing at Rs 61 against the dollar. The CAD is at a record high of 4.8 percent of the GDP or $88 billion making things worse and the economy lot vulnerable in the global environment now.
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