Mumbai: The Reserve Bank on Tuesday said it opposes 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.
"It (issue of sovereign bonds) will compromise our financial stability, if people factor in the exchange rate variation. In the RBI's view, the cost of a sovereign bond issue, especially in the current juncture, outweighs the benefits," RBI Governor D Subbarao said at the customary press conference after unveiling the first quarter review here.
"We should be doing a sovereign bond issue, if at all, from a position of strength, when we are much less vulnerable than at this time," he said.
Citing the advantages of sovereign bonds, the RBI chief said, "There are perceived benefits -- like it will buffer your reserves, it will lower interest rates, it will establish a benchmark for government borrowing and broaden the investor base."
Those are the standard arguments of a sovereign bond issue, but there are costs, he added.
The government earlier this month had said a sovereign bond issue was an option to tackle forex volatility. According to estimates, India can mop up USD 20 billion from NRI bonds.
State Bank of India Chairman Pratip Chaudhuri was against the idea of floating bonds for non-resident Indians (NRI) as the situation is not conducive for this.
"Of course (I am opposed to an NRI bond). It won't work. The bonds, when they were issued (previously), the absolute rates were like 7-8 percent. Today, when you do that bond, may be 4-5 percent, that's hardly anything exciting enough," Chaudhuri said.
The government had used NRI bonds as a tool to stem the rupee's fall in 1991, 1998 and 2001.
India issued India Development Bonds in 1991, Resurgent India Bonds in 1998 and India Millennium Deposits in 2001 to raise foreign exchange to deal with external sector problems.
Banks had raised USD 1.6 billion, USD 4.8 billion and USD 5.5 billion, respectively, from the bonds targeted at NRIs.
The rupee has depreciated by over 10 percent against the dollar since the beginning of the fiscal. The currency hit a record low of 61.21 a dollar on July 8, forcing the central bank and capital markets regulator Sebi to take unconventional measures to address exchange rate volatility.
During 2012-13, the current account deficit, which is the difference between the outflow and inflow of foreign currency, hit a record high of 4.8 percent of GDP or USD 88 billion.
First Published: Tuesday, July 30, 2013, 20:23