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India’s first Overseas Bond

India’s first Overseas Bond

Tag:GS3 || Economy || Banking and financial sector || Forex market

Why in news ?

  • Finance Minister announced in her Budget speech plans to raise a portion of its gross borrowing from overseas markets.
  • The government and the RBI will reportedly finalise the plans for the overseas issue of sovereign bonds by September.

What is Bonds ?

  • A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital.
  • They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.

What is Overseas Bond ?

  • A government bond or sovereign bond is a form of debt that the government undertakes wherein it issues bonds with the promise to pay periodic interest payments and also repay the entire face value of the bond on the maturity date.
  • So far, the government has only issued bonds in the domestic market.
  • According to FM, India’s sovereign external debt to GDP ratio is among the lowest around the world, at less than 5%.
  • Against this background, the government will start raising a part of its gross borrowing programme in external markets in external currencies.

Why issue such bonds?

  • Government borrowing is at such a level that there are not enough funds available for the private sector to adequately meet its credit and investment needs.
  • If the private sector cannot borrow adequately, then it cannot invest as it wants to, and that cripples one major engine of economic growth.
  • Government borrowing accounts for about 80-85% of domestic savings.
  • The overseas borrowing programme allows the government to maintain its gradual reduction of the fiscal deficit.
  • Borrowing overseas allows the government to raise funds in such a way that there is enough domestic credit available for the private sector.

Risks associated :

  • Several economists have expressed their concerns over the fact that India might follow the path of some Central and South American countries such as Mexico and Brazil.
  • In the 1970s, several of these countries borrowed heavily overseas when the global market was flush with liquidity.
  • But then, when their currencies depreciated sharply a decade later, these countries were in big trouble as they could not repay their debt.
  • India is not likely to be viewed as a risky proposition by the international market and so is likely to fetch an attractive rate for the bonds.