Brace for more pain: CAD's lower but India's external debt up 13%

While India’s current account deficit (CAD) narrowed down to $18.2 billion (3.6 percent of GDP) in the March quarter from 6.7 percent in the quarter-ago period, India’s external debt rose higher-than-expected to 390 billion in constant dollar terms. The rate of growth of external debt is faster than rate of growth of nominal GDP.

India’s external debt rose by nearly 13 percent to $390 billion in 2012-13, mainly due to rise in short-term trade credit and external commercial borrowings (ECBs) in the back of high current account deficit, the Reserve Bank of India (RBI) said today.“The high current account deficit witnessed during 2012-13 and its financing increasingly through debt flows particularly by trade credit resulted in significant rise in India’s external debt during 2012-13,” RBI said in a release.

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“We are becoming little more dollarised than we were earlier. We need to curb this tendency, $390 billion of debt against $290 billion Fx reserves is a ratio in the recent times at one of the lows and that is the external debt numbers, external debt situation should get more focus now,” said Samiran Chakraborty of Standard Chartered Bank in an interview with CNBC-TV18.

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With the rupee down over 7 percent in June, the country desperately needs to retain foreign investment and avert a balance-of-payments crisis.

The increase in the debt during 2012-13 was primarily on account of rise in short-term trade credit. There has been sizeable rise in ECBs and rupee denominated non-resident Indian (NRI) deposits as well, RBI said.

“However, magnitude of increase in external debt was offset to some extent due to valuation change (gain) resulting from appreciation of US dollar against Indian rupee and other international currencies,” the RBI added. The total external debt was about $345.5 billion at end-March 2012.

RBI further said that excluding the valuation change due to the movement of US dollar against major international currencies and rupee, the external debt as at end-March 2013 would have increased by $55.8 billion. However, the actual increase was lower at $44.6 billion.

As per the data, share of ECBs ($120.9 billion) continued to be highest at 31 per cent of the total debt, followed by short term debt (24.8 per cent) and NRI deposits (18.2 per cent). Trade credit components of external debt (both long-term and short-term) showed an increase of $20.3 billion during the period.

NRI deposits increased by $12.2 billion to $70.8 billion as at end-March 2013 primarily on account of increase in rupee denominated NRI deposits reflecting the impact of deregulation of interest rates on these deposits in December 2011, RBI added.

As far as the currency composition of the debt is concerned, the US dollar denominated debt continued to be the largest component with a share of 57.2 per cent, followed by rupee (24 per cent), SDR (7.5 per cent), Japanese yen (6.3 per cent) and euro (3.5 per cent).

The ratio of foreign exchange reserves to external debt as at end-March 2013 at 74.9 percent was lower than the level of end-March 2012 (85.2 percent).

With inputs from PTI