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Should we fund current account deficit this way?
Tue, 30 Apr Pre-Open

Desperate times need desperate measures. It's an age old adage that perhaps the former Finance Minister took too seriously when he suggested the possibility of using sovereign bond to face the issue of increasing current account deficit (CAD). Before we go further on this, let us discuss what a sovereign bond means. A sovereign bond is a bond (debt security) issued by the Government in foreign currency. The idea is to use these dollar denominated bonds as a low cost option (considering low interest environment abroad) and finance the CAD. However, recently, the finance ministry said that it will not do that as gold and crude prices are coming down which is likely to ease the CAD. However, let us see what can happen if such a move is taken by the government.

Despite the low interest rate environment abroad, the Government will need to borrow at higher costs. This is because it will have to pay extra for its bonds which don't enjoy a high confidence of the rating agencies, courtesy poor fundamentals of the Indian economy. Second, such a move will lead to negative sentiments regarding the state of the Indian economy setting off alarm bells and raising the cost of debt further. Also, it will not leave much on the table for private sector investments that might have opted for foreign funds. More importantly, it will mean an increase in the external debt that could be risky, especially when rupee as a currency has lost much value.

Hence, we are better off not using this option. Rather, it would be worthwhile if the Government thinks of putting into effect some measures that can improve fundamentals of the economy. While it has taken some measures in this direction by rolling out reforms, these are just the baby steps. We have a long way to go and we certainly cannot afford to be complacent.

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