Short-term external debt to be redefined

The Centre is expected to expand the scope of the definition of short-term external debt to include investment in domestic debt paper by foreign institutional investors (FIIs).

This will help the finance ministry better assess the volatility in short-term external debt flows.

The ministry has asked the Securities and Exchange Board of India to furnish data on outstanding FII investment in government and corporate securities.

The move will eliminate one of the major perceived shortcomings of the country's external debt classification.

Till last year, the Centre had taken the stance that it was not possible to do much as requisite data on the exposure of FIIs in the domestic debt market was not available.

Countries usually keep a watch on short-term debt to ensure that there is no flight of capital.

As on December 31, 2003, the total outstanding short-term investment by FIIs in treasury bills and corporate papers was Rs 5,223.29 crore or $1.15 billion, which was 94.1 per cent of the total FII investment in debt instruments in the country.

This will push the country's short-term external debt from $5.773 billion to $6.876 billion, according to the status report on external debt released by the finance ministry yesterday.

This will also raise the percentage of the country's short-term debt to total external debt to 6.14 per cent.

The report of the Institutional Development Finance (IDF) project of the World Bank on short-term debt has also recommended that data on FII investment in debt securities be included in India's external debt statistics.

IDF said FII investments in debt papers in both government and corporate securities should be reflected in a disaggregated manner in terms of short and long-term maturities.

Of the total FII inflow in debt, an overwhelming 92 per cent is invested in government securities. Of this, investment in treasury bills of less than one-year maturity accounted for 90 per cent of the exposure.

To avoid volatility in the market, the finance ministry sets an annual cap for FII investment in debt papers. The cap is based on the acquisition cost and not on outstanding maturity.