The government is considering a sovereign long-term dollar-denominated bond overseas to raise funds to ease Indian banks and companies' access to liquidity, which has been drying up owing to the global financial crisis.

The government plans to test the waters sometime in December this year or January next year when global financial markets are expected to stabilise. So far, India has stayed away from raising sovereign debt overseas.

Sources close to the development said, the proposal has been discussed and the details are being worked out jointly by the Reserve Bank of India [Get Quote] and the government.

To start with, the bond issue is likely to be $1 billion and the amount could be used for further lending to public and private sector projects. This will help the Indian companies meet a part of their foreign exchange expenditure. The maturity of these bonds will be project-linked, said sources.

The cost involved in floating such sovereign funds and servicing the interest will be handled by the government's recently set-up debt management office. The amount raised through these bonds will be outside the ambit of the foreign exchange reserve and may be held in a separate account.

Thus, sources said, there will be no sterilisation cost involved since the money will not be converted into rupees. "This is not a one-time measure like the Resurgent Indian Bonds or India Millennium Deposits. Instead, this is proposed to be a continuous part of the monetary management process," said a source.

Sterilisation refers to insulating the domestic financial system from excess money supply while RBI buys foreign exchange from the market. This is done by absorbing these funds by issuing bonds and treasury bills.

As part of the subscription drive, the government intends to target foreign investors, especially institutional investors who have always been seeking higher investment limits in the Indian debt instruments.

Moreover, the Indian companies could bargain for better spread for their overseas loans with the comfort of the forex reserve level.

The move comes at a time when foreign exchange reserves are declining - they have dipped by $18 billion since March to $291.82 billion (as on September 26).

India Infrastructure Finance Company Ltd, a government-owned entity, has set up a $5-billion special purpose vehicle to finance spending related to infrastructure projects. The money was set aside from the foreign exchange reserves. The forex reserves have dipped since, March mainly due to institutional outflows.

Sources said that the latest move is part of a comprehensive strategy to better manage the forex reserves at a time when the financial markets are in turmoil globally.

Sources added that the current dollar crisis may also impact funding from multilateral institutions. Floating the bonds may also be an alternative to the earlier proposed sovereign wealth fund.