The benchmark 10-year bond yield rose as much as 11 basis points to 6.55 percent after the news of a rethink of the proposal, as market participants fear this may boost government borrowing in the domestic market.
The Prime Minister's Office (PMO) wants the finance ministry to reassess the idea of issuing foreign currency overseas sovereign bonds, two sources with knowledge of the development said on July 25.
The office has asked the finance ministry to seek wider consultation from stakeholders before proceeding with any plans, said the sources, who declined to be identified as they were not authorised to speak to the media.
The Ministry of Finance and the PMO declined to comment on the matter.
This month, Finance Minister Nirmala Sitharaman said in her budget speech that India would look to issue overseas foreign currency sovereign bonds.
The idea, however, has been criticised by former heads of the Reserve Bank of India, economists and allies of the ruling Bharatiya Janata Party alike, as they argued it could create long-term economic risks by exposing the government's liabilities to currency fluctuations.
The benchmark 10-year bond yield rose as much as 11 basis points to 6.55% after the news of a rethink of the proposal, as market participants fear this may boost government borrowing in the domestic market.
The PMO was not properly apprised of the consequences of overseas dollar-denominated bonds by outgoing finance secretary Subhash Chandra Garg, who originally pushed this idea, said one of the two sources, who is an adviser to the government.
The proposal to raise funds via overseas bonds is likely to be withdrawn, and as an alternative, the government could raise funds through rupee-denominated bonds in the overseas market, he added.
Garg, a high-flying finance ministry bureaucrat, was in a surprise move transferred to the less high-profile power ministry late on Wednesday.
Garg was a central figure amid the tension that arose between the government and the RBI in 2018, that culminated with the sudden departure of former RBI governor Urjit Patel in December.
It was not immediately clear whether Garg's transfer was linked to the fallout from the overseas bond proposal, but a third source told Reuters on Thursday that Garg had applied for voluntary retirement after being handed the transfer.
Garg told media later on Thursday that he had sought voluntary retirement, but would serve out a notice period of three months and take charge as power secretary until then.
He declined to comment on the sovereign bond issuance.The finance ministry declined to comment on Garg's transfer, or voluntary retirement application.