In recent months, at various intervals, Indian media has provided misleading coverage of the risks posed by India's hard currency debt owed to foreign creditors, saying these are minimal. On the contrary, risks stemming from current levels of short-term hard currency debt are significant.
On August 23 and 29, Business Standard carried reports on India's external debt, which mention that the short-term component by original maturity was 27.7 per cent of the foreign exchange (FX) reserves as of September 2014 and the volume of FX debt was about $85 billion as of March 2015.
Analysis of elementary risk management suggests that India's hard currency debt should be divided into residual (not original) maturity buckets. That is, we should focus on how much FX debt would mature in the next 12 months, then between 12-24 months and so on. By this metric, FX debt which is due for repayment in the next 12 months, is about 54 per cent ($192 billion) of India's FX reserves of $356 billion.
It would be useful if this newspaper clarifies when publishing an article on FX debt that India runs a perennial deficit in its trade in goods and our short-term FX debt has been more than 50 per cent of FX reserves for the last three years. At present, given low oil and gas prices, India's current account (c/a) deficit is comfortably low. However, even this low c/a deficit has to be funded by a capital account surplus or by drawing down FX reserves. A higher volume limit (currently at $30 billion) for foreign portfolio investments (FPI) in the government of India's debt is not prudent in terms of hard currency debt management. From the experience of August 2013, we know that FPIs withdraw first from their investments in the government's debt.
Jaimini Bhagwati New Delhi
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