Presenting the Union Budget 2019-20 on Friday, Finance Minister Nirmala Sitharaman proposed to raise a part of the government's gross borrowings from abroad.
The move, designed to free up additional liquidity in the domestic market, is expected to strengthen the Indian rupee, consequently hurting the country's exports.
"Sovereign bond demand will rise which will appreciate the price of rupee slightly... this might impact our exports by up to 5 per cent in the short-run. Since India's export basket has significant representation of primary and labour intensive products, the elasticity test will work and can be a stabiliser, in the long-run," Export Promotion Council of India Chairman Mohit Singla told .
"Despite the fact that India's sovereign debt is certainly lower than many other nations, the country's credit rating is still quite modest compared to the US, Japan, and Australia, whose debt-to-GDP ratio is almost around 150 per cent but the credit rating is of 'AAA' category," he added.
Currently, rising trade protectionism, along with tensions in the Middle East, have hampered merchandise exports and widened India's trade deficit.
A widening trade deficit at this time will come as a double whammy for the economy, which already faces a slowdown in internal consumption.
Latest official figures show India's merchandise exports rose 3.93 per cent in May on a year-on-year basis to $29.99 billion, from $28.86 billion reported for the corresponding month of last year.
However, the trade deficit during May widened to $15.36 billion as against the deficit of $14.62 billion in May 2018.
Offloading sovereign bonds is a mechanism available to governments for raising cheaper funds from international markets.
"India's sovereign external debt to GDP is among the lowest globally at less than 5 per cent," Sitharaman said in her maiden Budget speech in Parliament on Friday.
"The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have beneficial impact on demand situation for the government securities in domestic market," she added.
A sovereign bond is a debt security issued by a national government. Sovereign bonds can be denominated in a foreign currency or the government's domestic currency.
It will be a maiden such bond issuance. In 2013, the government had considered the idea, but never implemented it. At that time, the country was faced with major fiscal and current account deficits.
Instead, the Reserve Bank of India (RBI) at that time announced a scheme to incentivise foreign currency non-resident (FCNR) deposits, which brought in nearly $34 billion. As a result, most of India's debt is rupee-denominated.
The government's latest move is being seen as prudent in the face of limited options to raise funds as a slowing economy curtails tax revenue, while the borrowing target of a record Rs 7.1 trillion ($104 billion) this fiscal year remains a tough task.
According to Sajal Gupta, Head, Forex and Rates, Edelweiss Securities, "the Budget aiming for a lower interest rate regime and foreign investment being opened in various forms looks to make rupee stronger in the coming times."
"What needs to be seen is RBI's intervention to stem it," he added.
(Rohit Vaid can be contacted at rohit.v@.in)
( With inputs from IANS )