The Governor Subbarao has said the Reserve Bank is against launching sovereign bonds now to bridge a widening current account deficit saying the benefits of raising foreign capital through such an instrument outweigh the costs involved in doing so."The issuance of sovereign bonds will compromise our financial stability, if people factor in the exchange rate variation. In our view, the cost of a sovereign bond issue, especially in the current juncture, outweighs the benefits," Subbarao said at the customary press conference after unveiling the first quarter review.

 

"We should be doing a sovereign bond issue, if at all, from a position of strength, when we are much less vulnerable than at this time," he said.Citing the advantages of sovereign bonds, the RBI chief said, "there are perceived benefits like it will buffer our reserves, it will lower interest rates, it will establish a benchmark for government borrowing and broaden the investor base."Those are the standard arguments of a sovereign bond issue, but there are costs, he added.  The government earlier this month had said a sovereign bond issue was an option to tackle forex volatility.

 

According to estimates, the government can mop up $20 billion from NRI bonds.State Bank of India chairman Pratip Chaudhuri is against the idea of floating bonds for non-resident Indians (NRI) as the situation is not conducive for this."Of course (I am opposed to an NRI bond). It won't work. The bonds, when they were issued (previously), the absolute rates were like 7-8 percent. Today, when you do that bond, may be 4-5 percent, that's hardly anything exciting enough," Chaudhuri said.

 

The government had used NRI bonds as a tool to stem the rupee's fall in 1991, 1998 and 2001.The government had issued the India Development Bonds in 1991, the Resurgent India Bonds in 1998 and the India Millennium Deposits in 2001 to raise foreign exchange to deal with external sector problems and raised $1.6 billion, $4.8 billion and $5.5 billion, respectively, from the bonds targeted at NRIs.

 

The rupee has depreciated by over 12 percent against the dollar since the beginning of the fiscal. The currency hit a record low of 61.21 a dollar on July 8, forcing the central bank and capital markets regulator Sebi to take unconventional measures to address exchange rate volatility.During 2012-13, the current account deficit, which is the difference between the outflow and inflow of foreign currency, hit a record high of 4.8 percent of GDP or $88 billion.