Risk dynamics of Sovereign Bonds in the time of COVID -19 in India

Abstract

Governments globally are tackling the pandemic with a combination of fiscal, macroprudential,
monetary, public health, and market-based policies. By assessing the effect of the pandemic globally on
sovereign Credit Default Swaps spreads using an event study methodology it is found that a higher number
of cases and deaths and public health control responses significantly intensifies the ambiguity among
investors in sovereign bonds. Amidst this pandemic, the Government of India has declared a fiscal
package worth INR 1.7 trillion. Using data from different countries, this paper first estimates the
association between fiscal expenditure and COVID-19 blowout, economic inflexibility, and
macroeconomic factors. The evaluations suggest that India can utilise 2.2-4.8 percent of its Gross
Domestic Product (GDP), based on the global benchmark. Taking tax and output shortage into account,
the projection of the fiscal deficit of the government can be around 8.4 percent, in the most negative case,
while 3.7 percent in a relatively positive case. The paper tried to analyse how these numbers affect the
investor confidence for sovereign bonds. It finally discusses that subsidy rationalization is the way ahead
to fund health expenses and transfers while sustaining the fiscal discipline.