Covid bonds on the cards for long-term debt mobilisation

January 31, 2021

Covid bonds on the cards for long-term debt mobilisation

As the country’s fight against Coronavirus reaches the next level with the launch of the world’s largest vaccination programme, the government proposes to launch new Covid bonds to finance the rising pandemic relief expenses.

Sources privy to the development said that the announcement on Covid bonds may be made in the budget to be presented by finance minister Nirmala Sitharaman on February 1.

Though the budget may be used to announce its launch, the bond issue may be made only in the next financial year as government has almost completed it borrowing calendar for FY21 with finance ministry officials indicating no need to scale up already high levels of borrowings this year.

Sources said that though resource mobilisation through debt instruments is not a problem for the government currently, the Covid bond will aim to channelise large proportion of private savings into this long term instrument. The bond would be made attractive to get participation even from retail investors by offering a coupon rate higher than yield on benchmark 10 year government securities, sources said.

Yield on benchmark 10 year yield now is 5.95 per cent. The new Covid bond may carry coupon rate higher this level.

“Though the idea to mobilise resources from the Covid bond is not bad, government may not be needing it this year as it is flush with cash balances in its account while debt mobilisation has been relatively easy. Also, the country’s banking system is full of liquidity and is willing to lend if demand is generated,” said a bond market expert with one the leading global consultancy firms, asking not to be named.

Others, however feel that in a situation where the demand-side continues to be weak, any additional form of taxation is a bad idea, but raising funds through bonds which have attractive conditions is a better idea because that would be a voluntary shift by the people.

Apart from the plan on Covid bonds, the government is also exploring levying a new Coronavirus cess or surcharge to mobilise resources required finance anti-Covid vaccination programme. This measure will, however add another level of taxation on individuals, especially in the high-income bracket, who already face one of the highest levels of taxes.