External debt worsens as short-term debt rises

The rise in external debt was primarily on account of short-term trade credit, ECBs and NRI deposits

The rise in short-term debt is badly affecting India’s external debt position, according to experts. Short-term debt accounted for 44.2 per cent of total external debt as at end-March, based on residual maturity. Of this, the share of non-resident Indian (NRI) deposits was 28.4 per cent.

In absolute terms, based on residual maturity, short-term debt accounted for $172 billion of the total external debt worth $390 billion as on end-March, according to Reserve Bank of India (RBI) data released on Thursday. This is 12.8 per cent over the year-ago period, when short-term debt accounted for $147 billion of the total external debt of $346 billion. The rise in external debt was primarily on account of short-term trade credit, external commercial borrowings (ECBs) and NRI deposits.

According to Sonal Varma and Aman Mohunta of Nomura, even with a fully-funded current account deficit (CAD), increasing short-term debt is a big concern because it has raised India’s external vulnerability.

“We have highlighted India's rising external vulnerability due to the double-edged sword of debt capital inflows. They help finance the CAD (flow) but worsen the balance sheet (stock). With global risks on the rise, we expect difficulty in rolling over debt to put pressure on net capital inflows, which remains a bigger risk for the currency this year,” they said in a note.

The long-term debt at $293.4 billion and short-term debt at $96.7 billion accounted for 75.2 per cent and 24.8 per cent, respectively, of the total external debt as at end-March 2013, according to RBI data.

The share of ECBs ($120.9 billion) continued to be the highest at 31 per cent of total external debt, followed by short-term debt (24.8 per cent) and NRI deposits at (18.2 per cent), said RBI.

The central bank’s forex reserves have been depleting and that is seen as a concern.

Mole Hau of BNP Paribas said: “India’s reserve coverage deteriorated further and the ratio of reserves (ex-gold), at 2.7, is now the lowest since 1997. These have inevitably raised concerns as to whether the RBI has the ability to make a credible intervention to manage exchange rate expectations. With exchange rate policy lacking a solid backing of reserves, India’s elevated short-term external financing needs clearly highlight the potential for the rupee to suffer further if global risk appetite continues to retreat.”

RBI data showed the ratio of foreign exchange reserves to total debt dropped to 74.9 per cent by end-March, down from 85.1 per cent a year ago, indicating a higher stress.