With India's forex reserves now above $500 bn and India staring at a record fiscal deficit (>12%) this FY, isn't the time for us once again to explore sovereign bond (SB) issuance.

If market experts were not comfortable with SB at $400-425 bln FX reserves last year, not sure if they hold the same view with reserves now above $500 bln, and FX related parameters like import cover, short term external debt/NIIP vs FX reserves further improving.

What's the point of having such a large reserve yielding around 1-1.5% and govt borrowing in domestic market around 6%.

The way a company has to diversify its borrowing to be not overly dependent on one single source, in a similar fashion, debt manager to the govt also has to think how to spread and reduce the borrowing cost, when world is once again awash with dollar liquidity.

A smart capital allocator is one who can identify the opportunities and can take advantage of the same. Capital allocation does not only mean capital deployment but also capital raising and our FX reserves is definitely not coming cheap.

Since India is not a current account surplus country, accretion to FX reserves is mainly on account of capital inflows, which is again a liabilities, with some very sticky (FDI) to moderately sticky (equity), to some very fluid and interest rate sensitive (debt) inflows.

Look at the growth of investment income over the years. It is nothing but interest (coupon) paid on debt securities, royalty & dividend paid to foreign promoters etc. It has grown from (-) $4.6 bln in FY01 to (-) $31 bln in FY19 and will grow with more capital inflows.

So basically, higher FX reserves is not coming cheap, whichever way we see - capital raising ($32/33 bln annual cost) or capital allocation (1-1.5% on investment in US tsys). So why not look at SB, if it helps to reduce cost and relieve some pressure on domestic bond market.

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