Impact of of Issuance of Sovereign bonds on Short Term and Long Term On Short Terms Bond issuance will alleviate

short-term concerns on the funding of cad and assuage the negative sentiment enveloping the rupee. it may act as a check on govt spending and may ensure commitment to fiscal targets. - By Shubhada Rao Although in Short Term Issue of Sovereign bonds will create new dynamics in the global markets. It would alleviate short-term concerns on the funding of CAD and assuage the negative sentiment enveloping the rupee. Subscription to these bonds linked to Indias sovereign rating, it may act as a check on the governments spending and may further ensure commitment to fiscal targets. It could be used as a low-cost option of financing the budgetary deficit. Issuing a global bond might send such a signal, so instead policymakers will focus on attracting funds from Indians living abroad, such as by raising deposit rates in India or issuing bonds specifically designed for them - repeating measures carried out in 1998 and 2000 to steady a weak rupee. Circumventing the risks of sudden withdrawals owing to change in global risk appetite Would be to consider issuing dollar-denominated bonds targeted exclusively at nonresident Indians with an option of redemption only at maturity. In the past, India had successfully raised funds through dollar- denominated NRI bonds in 1991, 1998

and 2001.It should be noted that recourse to sovereign bonds can act as a short term Remedy. On long Terms The bond issuance would increase the duration of Indias debt profile and may lead to further dent in in visibles account through debt servicing costs. A sudden reversal in global liquidity scenario or change in risk perception of India may trigger investment outflows adding to external sector vulnerability in long terms It can result in long term worsening of certain external sector parameters such as debt to export earnings and forex cover ratio although the ratio of short-term debt-to-GDP and import cover . In the long run, there can be no substitutes to sound macroeconomic fundamentals in case of India . The issue of sovereign bonds in a scenario of depreciating domestic currency, (and the difficulty of rolling over short-term debt) would lead to balance sheet problems which could become a key source of financial instability and possibility of default. Sovereign bonds, essentially debt instruments issued in foreign currencies, is that they carry with them the problem of Original Sin (Eichengreen and Hausmann, 1999) for developing countries like India. It will also increase the borrowing costs through at least three routes: the risk of default, monetization-driven depreciation and inflation.

Indian Scenario: The Indian government hasn't been too eager to bring out such an issue as it could push up its overseas debt and interest burden. It has instead tried to focus on deepening domestic markets to meet its capital needs. In the past, the government neither issued a sovereign bond directly, nor did it opt for regular issues. In 1991, India Development Bond was a quasi-sovereign bond, while the Resurgent India Bond in 1998 and the Millennium India Deposit in 2000 were NRI bonds. All these were one-time issuances. Through these bonds, banks had raised $1.6 billion, $4.8 billion and $5.5 billion, respectively. If you see the Euro zone, they have this external holding of debt. So far, India had the advantage of debt being held internally. That advantage will go away and external holding of debt can create huge stress in the system. It has been observed in the past that small trigger can create volatility in the bond market. A sovereign bond issuance by India at this time would come with its own consequences. For starters, the timing is not right. In 2000 when Millennium Deposits were raised, India had import cover of 10 months (against six months at present) and current account deficit was at 0.5 per cent of the GDP (against FY13's 4.8 per cent). A sovereign bond issuance would smell of desperation at this point, which is why the Reserve Bank of India is not in favour of it. If at all such a bond is considered, the yields would have to be higher than the prevailing rates for foreign currency non-resident deposit rate of 4.5 per cent (for five years). If the government hedges this foreign currency risk, then the yields on these bonds would go up to 10 per cent. Also given India's precarious macro-economic situation, it's unlikely that investors will bet on the rupee's appreciation in future. Ravi Sundar Muthukrishnan of ICICI Securities believes that even though India's external liability situation is comfortable, a significant increase in external debt may call into question India's 'BBB-'rating.