PMEAC member Rathin Roy says govt should rethink sovereign bond plan

The government should listen to past governors and rethink the decision to issue a sovereign bond, said a member of the Prime Minister's Economic Advisory Council. "Show me one country after world war which has done a foreign currency sovereign bond and not paid dearly for it," said Rathin Roy.

Brazil, Argentina, Turkey, Greece, Indonesia have all paid a price for foreign currency sovereign borrowings, Roy added.

Finance minister Nirmala Sitharaman in the Budget proposed that the government plans to raise part of its gross borrowing in external markets via foreign currency borrowings to tide over liquidity crunch in the domestic market.

"I have grave concerns about this proposal on grounds of economic sovereignty, and about the macroeconomic consequences," said Roy, adding that the government should instead look at relaxing the rupee bond limits for foreign portfolio investors.

"I would pay very careful attention to former Governor Reddy’s argument that these are sovereign liabilities in perpetuity. I would pay very careful attention to the history of this country, on why we have not gone down to this route in 70 years, despite huge provocations to do so. And I would pay very careful attention to Governor Raghuram Rajan’s statement, and I would urge very respectfully, a public consultation on this subject, a public discussion, rather than imperial announcements of borrowing programmes being made without taking account of these facts," Roy pointed out.

Finance secretary Subhash Chandra Garg had said that the sovereign bond issue will be 10-15 percent of foreign borrowings.

"I am confused why this cannot be done issuing rupee bonds. Of course,  if you keep your fiscal intact and you borrow some money from abroad or from foreigners, then you borrow less from domestic savings, but you can do that by denominating rupee bonds. We don’t have a foreign exchange crisis in this country, so it’s not the forex crisis that is impelling recourse to foreign money," Roy noted.

Former RBI governors Raghuram Rajan, C Rangarajan and YV Redy and former chief statistician Pronab Sen had also raised concerns over the finance ministry's proposal.

"If the government owes debt to its citizens there can never be a case of sovereign default. The problem always occurs when the government owes debt outside. This is the problem all over Latin America, and in Greece. So anywhere where the government have actually borrowed abroad they have run into problems," said Sen in an interview with CNBC-TV18.

Rajan has said that the sovereign bond issue proposal has no real benefits and is loaded with risks.