Sovereign bonds may expose India to poor credit rating: Analysts

A fresh debate has triggered on implication for domestic firms raising money from abroad.

While finance minister P Chidambaram is maintaining that the government is considering all options,including the possibility of issuing sovereign bonds,to check the slump,a fresh debate has triggered on its implication for domestic firms raising money from abroad.

Sources have told FE that the government is in no rush to issue its first-ever sovereign bond as it is still evaluating its pros and cons,including the impact on borrowing plans of corporates as the sovereign bond price acts a benchmark for borrowing overseas.

Sovereign bonds are debt securities issued by national governments denominated in either local currency or a global currency,like the US dollar or euro. The bond will be a benchmark for companies borrowing abroad in a similar way government security (G-Sec) bonds act as a floor price for debt raised domestically by companies.

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The yield on a 10-year bench mark government security is 8.38% as on September 4. This would mean that any corporate looking to raise money domestically will have to offer a return higher than the yield on government paper.

Although the government has virtually ruled out sovereign bonds as an option for now with the RBI strongly advocating against it,markets are still buzzing with a bleak possibility of such a bond being considered. Economic affairs secretary Arvind Mayaram also ruled out sovereign bonds in a conference call with investors recently as it would trigger panic. Analysts believe a sovereign bond might expose India to poor credit rating given its weak fundamentals including high current account deficit and low currency reserves compared to other BRIC countries.

J Moses Harding,market expert from Induslnd bank said,At a time when most of the measures announced by the government and RBI have failed to revive markets or arrest the fall in rupee,sovereign bond with weak rating will raise the cost of overseas borrowing for companies.

India is rated BBB- by S&P,Baa3 by Moody’s and BBB- by Fitch. The global rating agency S&P and Fitch have a negative outlook on India while Moodys has a stable outlook.

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India’s CAD stood at $88 billion while this year the finance ministry is trying to contain the deficit at $70 billion. Samir Kanabar from Ernst and Young said factors such a creditworthiness of the country,exposure to external risk and stable exchange rate are crucial for the sovereign bonds to succeed. The current negative sentiment on emerging markets will impact the rating of such bonds and hence impact the borrowing by corporates also.