India is set to float a first-of-its-kind multi-billion-dollar 30-year proxy sovereign bond that will allow the government to dig into the pockets of foreign pension and institutional investors to raise funds for highways, stem the rupee slide and test global money managers' confidence in a slowing economy that has been targeted unsparingly by credit rating firms.
State-owned India Infrastructure Finance Corporation Ltd, which is finalising the broad contours of the bond, will borrow money from foreign investors. And about 80% of the money will head towards India's cash-starved infrastructure sector.
The balance will be used to strengthen the balance sheets of public sector banks so that they can lend more, a top government source told HT.
The inflow of dollars will also help prop up the rupee, which hit a record low of 57.32 against the dollar in June.
It has slid 12% since March and stoked inflation by knocking up prices of most imported goods, including crude oil and gadgets.
"Foreign pension funds have shown interest in parking about 10% of their funds in long-term India bonds, if they come with some government guarantee," another government source said.
IIFCL is reportedly discussing the modalities for floating the bond with a string of international banks.
The bond, likely to come with a guaranteed return of about 9%, will be structured as a surrogate long-term sovereign bond floated by India.
"While the bond will be of 30-year duration, there is very little appetite for Indian, or any emerging market, paper for more than five years," a senior official said.
"However, with Europe imploding, this bond should be able to sail through."
The Resurgent India Bond (RIB) 1998 and the India Millennium Deposit (IMD) 2000 were also similar bonds targeted at channelising NRI savings into India, but were of much shorter tenure of five years.
India's economy has slowed to a growth rate of 5.3% in the last quarter of 2011-12, the slowest since 2003-04 amid global rating agencies' concerns that managing a restive alliance has consumed more time rather that prudent policy making.
A widening current account deficit - the gap between export earnings and import payments - is among the immediate priorities that the government has identified to address through specific policy interventions.
Economists said the growing export earnings-import payments imbalance was a cause for concern.
"With oil prices already above $110 a barrel, large external commercial borrowing redemptions and rising FDI repatriation, India's balance of payment remains on a razor's edge," said Sonal Varma, economist at broking and research firm Nomura.