Debt Service Hump To Drain Forex Kitty

The $50 billion foreign exchange reserves the government has built up will face its first major drawdown by the end of 2002-03, when the country begins repaying $13 billion under the Resurgent India Bonds (RIBs) raised in 1998.

As per the projected debt servicing schedule of the government, it will have to pay about $13.5 billion from March next year on account of repayment of the dollar-denominated RIBs loans.

From then till 2006, the government will have to pay out a total of $33 billion as repayment obligation for RIBs and the subsequent India Millennium Deposits (IMDs).

From March 2004, the government will have to shell out $7.7 billion on account of other debts, including the remaining portion of RIBs. Starting March 2005, it will have to pay another $13 billion towards repayment of IMDs.

The government's debt service obligation as a result of this loan will substantially affect the forex kitty. This is because accruals to the reserves are gradual and depend on export performance and foreign investment, both direct and portfolio, and take a longer time to build.

For instance, the foreign exchange reserves, which stood at about $43 billion at the beginning of this fiscal, have risen by a mere $7 billion despite the active mop-up of greenbacks undertaken both by the Reserve Bank of India and commercial banks.

The reserves crossing the $ 50 billion mark is a psychological high for the country which, a decade ago, was left with forex reserves of $5.84 billion, sufficient to meet the country's import bill for only a few weeks.

The government went for an RIBs issue in 1998 and mopped up $4.2 billion debt with a five-year tenure, again to boost the forex reserves in the wake of the nuclear test in Pokhran and the subsequent economic sanctions.

In 2000, the government floated the India Millennium Deposits and raised $5.5 billion, again with a five-year tenure. Both the bonds are not tradable in secondary markets and cannot be encashed prematurely. They also carry an exchange rate guarantee from the government to the State Bank of India, which had acted as the lead borrower. Both are dollar-denominated debt.

While acknowledging there could be hump in debt service payments over the next four years, the government's status report on external debt said the burden could be mitigated as a significant part of these bonds could be transferred in favour of Indian residents or reinvested in the form of NRI deposits.