Govt may issue sovereign bonds

Former economic advisor to former Prime Minister AB Vajpayee S Narayan's proposal to raise India Sovereign Bonds is likely to be implemented by the new Government, informed sources revealed.

With the economy continuing to do well, despite rising inflation, the Government's thinking is to explore fresh investment avenues and tap into the externalities available for the India growth story. In a bid to bolster the farm sector as promised in the United Progressive Alliance's common minimum programme, the Government is intending to raise a whopping $5 billion from overseas markets in the form of India sovereign bonds.

According to highly placed sources, a proposal to this effect has been prepared by the Ministry of Finance and is likely to be placed before Prime Minister Manmohan Singh. The proposed bond issue will be in the line of Resurgent India Bonds (the Government raised nearly $4.23 billion in 1998 for five years) and SBI's India Millennium Deposits (raised $5.5 billion from NRIs which will mature in 2005).

Although the country's foreign exchange reserves of $119.93 billion, which rose by $587 million for the week ended June 18 after witnessing a decline in the past two weeks, are extremely comfortable, the Government hopes to create a special corpus for the agricultural sector, said a Ministry of Finance official.

The proposed sovereign bonds (yet to be named) will have long-term maturity of five years or more and are expected to carry an interest rate between 100-150 points over LIBOR (London Interbank Offered Rate), a Government official said.

Once the funds are raised, they will be utilised for raising disbursements to the agricultural sector. Modalities for supporting the farm sector are expected to be outlined in the forthcoming Budget.  The Government has already announced its intent to double the flow of credit to the farm sector within the next three years and to achieve a 30% annual growth in disbursement in this sector. And, that too at the lowest rate of interest.

While some of the strong banks can manage such a huge disbursement, weaker banks need assistance from the Government for taking such an exposure.

The proposed funds will be used to bridge such a shortfall of funds. Since cost of this fund is expected to be below 4%, even after including the hedging risk the cost is expected to be below 6% in the current scenario, the sources said. This route will help in bringing down the cost of funds which in turn will help in bring down the interest rate on farm loans.