Money & Banking

Foreign exchange cover to external debt at multi-year low


India's foreign exchange reserves as a proportion of external debt are increasingly shrinking. Reserves, among other things, are used to meet the debt obligations.

The forex reserves, which just about covered all of India's external debt as of March 2011, now covers only around 88.5 per cent (as of December 2011). While the foreign exchange reserves declined by 3 per cent in the nine months till December, what India owes the world increased by 9.4 per cent.

The ratio of reserves to external debt is the lowest since March 2003. During the March 2008 , the ratio was as high as 138 per cent.

The ratio is expected to deteriorate further as the reserve assets declined by another 1.3 per cent from December till the first week of April this year. There is a possibility of expansion in debt as well.

Short-term debt on the rise

In the growing pie of external debt, the borrowers are increasingly going for short-term debt (maturity of less than a year). The ratio of short-term debt to total debt as of December 2011 was 23 per cent as against 21 per cent in March 2011; the highest since June 2008. However, during that time (June 2008) India had more than enough reserves to cover the entire debt.

According to the Reserve Bank, as of September 2011, around 43.4 per cent of the total debt was short-term debt and debt with residual maturity of less than a year.

This indicates that by September 2012, around 45 per cent of the total reserves will go out of the system if this debt is not refinanced or equivalent inflows from other sources don't come through.

All this means that it will be increasingly difficult for the central bank to support the rupee .

As a consequence of the support given by the RBI to the rupee , the widening current account deficit and the increased debt outgo, the import cover of the forex reserves too is on a decline.

The reserves covering imports have fallen from 10.5 months to 7.3 months of imports in a period of 21 months ended December 2011.


Published on April 16, 2012

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