Finance Minister has announced in the Budget that it plans to raise a portion of its gross borrowing from overseas markets using sovereign bonds.
A government bond or sovereign bond is a form of debt that the government undertakes wherein it issues bonds with the promise to pay periodic interest payments and also repay the entire face value of the bond on the maturity date.So far, the government of India has only issued bonds in the domestic market.
The overseas borrowing programme allows the government to maintain its gradual reduction of the fiscal deficit.Fiscal deficit is the amount of money that the government needs to borrow in a given year because their expenses were more than their revenues.
Further,borrowing overseas allows the government to raise funds in such a way that there is enough domestic credit available for the private sector.This would also have a beneficial impact on the demand for government securities in India.
However,India might follow the path of some Central and South American countries such as Mexico and Brazil.In the 1970s,several of these countries borrowed heavily overseas.However,their currencies depreciated sharply a decade later and these countries could not repay back their debt.
Another risk to India from overseas borrowings is that this would lead to a quicker increase to its foreign exchange reserves, which would lead to a stronger rupee. A stronger rupee would encourage imports at a time when the government is trying to curb them.