Sovereign bond will make India hostage to the wild swings of global sentiment, says former RBI governor D Subbarao

Former Reserve Bank of India (RBI) governor D Subbarao in an interview with CNBC-TV18 said that it is very difficult to give a binary answer on sovereign bonds, adding that there are advantages, benefits, and costs to the issue.

When asked whether it is a good idea that the government of India wants to borrow some proportion from outside as a sovereign bond, he said: “It is very difficult to give a binary answer to whether sovereign bonds is a good or bad idea. There are advantages, benefits, there are costs.

"Among the benefits, I think, by far the biggest benefit would be that it has signalled India’s confidence about opening up its external sector.

"We have an unsavoury reputation about too much caution about capital sector liberalisation. So it will have significant positive externalities and bring in the long-term not just more foreign portfolio investment (FPI), more debt flow, more dollar flow but even more foreign direct investments (FDI).”

He added: "One big concern is that it will make India hostage to the wild swings of global sentiment about the country.

"Foreign investors we know are fickle, they come in when the going is good; they quit or exit at the slightest hint of trouble whereby we become vulnerable through exchange rate volatility and market turmoil. What Raghuram Rajan has said is absolutely right. Countries, which have committed the original sin believing that they will keep the door ajar, do it one time, be responsible, be prudent have come to grief. Argentina and Turkey are prime examples."

“The financial sector can withstand pressure for longer than people expects so pressure builds up and when implosion takes place, it is catastrophic,” said Subbarao.

On camouflaging of fiscal deficit, he said: “We should worry about camouflaging fiscal deficit — to use your — for a lot of other purposes because today not just the government borrowing, which is on budget 3.3 percent or expected to be 3.3 percent but if you combine on and off budget public sector borrowing it gobbles up not only the household financial savings but also eats into corporate savings. I think the market senses it, we should stop this practice, earlier the better.”