Safeguards, including defining of borrowing limits, are essential if India were to raise money from abroad through a sovereign bond sale, a report said on Friday.

The sovereign bond issue abroad found a mention in Finance Minister Nirmala Sitharaman’s budget speech last month, leading to controversy on whether the country should take the step which was not tested even during the 1991 crisis.

In its report, India Ratings said if the government opts for the sovereign borrowing in foreign currency, it should be accompanied by a “well-crafted policy/special safeguard” as foreign exchange reserves is an accumulation of capital account surplus, rather than a current account.

“One way of doing it could be to make it part of the Fiscal Responsibility and Budget Management Act, wherein annual limit as well as the total quantum of sovereign borrowings in foreign currency is defined,” it suggested.

It added that Indias balance of payment (BoP) position is “highly susceptible” to any adverse domestic or global macro development and warned that the “fickle” nature of foreign investors could be “destabilising” for the economy as has been experienced in the recent past as well, pointing to net outflows of $16 billion between April-October 2018.

The rating agency said until now, the government has followed a fairly cautious approach by capping the FPI limit in government securities (G-Secs).

It noted the rationale given by the government for such a borrowing, including the external debt-to-gross domestic product (GDP)-level at sub-5 per cent being among the lowest globally, diversification of resources and lower costs of borrowing.

“In the existing framework, allowing FPIs in the onshore market does not carry the currency or refinance risk, which is present in foreign currency-denominated debt,” it pointed out.

“In a scenario of depreciating currency, interest and debt obligations of foreign currency-denominated debts balloon and quite often make it unsustainable. Hedging currency risks carry significant costs and if opted, may make foreign currency-denominated debt less attractive compared with domestic debt,” it said.

Monetary policy transmission may also be affected through such a move as the rates will be decided by developments in global financial markets, it said.

It can be noted that a wide array of experts, including former Reserve Bank (RBI) Governors have flagged such a move as a risky bet and adviced against going ahead, while some like billionaire banker Uday Kotak has been supporting it.

Amid reports of the Government mulling to raise $10 billion in the next few months, former RBI Governor D Subbarao has said he will be ok with the government “testing” the markets but adviced against high issuances.

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