Daily News Analysis

India’s External Debt 2025

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India’s external debt has risen to USD 747.2 billion by the end of June 2025, marking a 1.5% increase from the previous quarter, according to the latest data from the Reserve Bank of India (RBI). Despite this increase, India’s external debt remains manageable due to various stabilizing factors.

Current Status of India’s External Debt

  1. Valuation Effects:

    • The increase in external debt was primarily due to valuation effects resulting from currency fluctuations.

    • A depreciation of the US dollar caused a valuation loss of USD 5.1 billion.

  2. Debt Coverage:

    • 93% of India’s external debt is covered by foreign exchange reserves, offering a solid cushion and ensuring strong external resilience.

    • The external debt-to-GDP ratio is 18.9%, which indicates a moderate and sustainable level of external liabilities.

  3. Debt Maturity Profile:

    • Long-term debt (with a maturity of more than one year) accounts for the bulk of the debt, standing at USD 611.7 billion.

    • Short-term debt has reduced to 18.1% of the total external debt, improving the short-term debt-to-reserves ratio and reducing rollover and liquidity risks.

  4. Currency-wise Composition:

    • US Dollar: 53.8% – Dominates India’s external debt, exposing it to fluctuations in global currency markets.

    • Indian Rupee: 30.6% – Reflects a substantial share of domestic-currency debt.

    • Japanese Yen: 6.6% – A minor share.

    • Special Drawing Rights (SDRs): 4.6% – A small portion.

    • Euro: 3.5% – A relatively smaller portion.

  5. Sector-wise Distribution:

    • Non-financial Corporations: 35.9% – The largest share, indicating a rise in private-sector external borrowings.

    • Government & Financial Institutions: The remaining portion of the external debt.

Key Features of External Debt

  1. Liability to Repay: External debt encompasses the principal and interest to be repaid.

  2. Currency Exposure: If external debt is denominated in foreign currencies, exchange rate fluctuations can increase the repayment burden.

  3. Sectoral Distribution: External debt can be owed by the government, financial institutions, or private corporations.

  4. Instruments: External debt is raised through loans, trade credits, bonds, deposits, etc.

Key Challenges Associated with Rising External Debt

  1. Exchange Rate Risk:

    • As much of India’s external debt is denominated in foreign currencies, fluctuations in exchange rates can make the debt more expensive to service.

  2. Interest Burden:

    • Increased external debt raises the interest burden, straining fiscal resources. This leaves fewer funds for development and social welfare programs.

    • Higher inflation can lead to rising interest rates, slowing economic growth and worsening the external debt-to-GDP ratio.

  3. Vulnerability to Global Shocks:

    • The global economy faces threats like stagflation, which can reduce demand for India’s exports and negatively affect the debt service ratio, complicating debt repayment.

  4. Crowding Out Domestic Investment:

    • Significant funds directed toward debt servicing may divert resources away from productive domestic investments in infrastructure and social welfare.

Key Measures to Manage External Debt

  1. Diversify Currency Exposure:

    • India can reduce its reliance on the US dollar by promoting the use of the rupee for external borrowings (rupee-denominated debt). This strategy would help mitigate risks related to currency fluctuations and enhance financial stability.

  2. Adopt Sustainable Debt Practices:

    • Borrowed funds should be channeled into productive investments, such as infrastructure projects and other development initiatives. This approach will help generate long-term economic returns and ensure that the debt remains sustainable.

  3. Extend Loan Maturities:

    • Opting for long-term loans would allow India to spread the repayment burden over a longer period, reducing the immediate pressure on public finances and easing liquidity concerns.

  4. Strengthen Fiscal Policies:

    • Robust fiscal policies focused on reducing budget deficits, controlling inflation, and ensuring economic stability will help reduce the vulnerability to external debt. This will also foster confidence among foreign investors and lenders, leading to more favorable borrowing terms in the future.

Conclusion

India’s external debt has been rising, primarily driven by valuation effects due to currency fluctuations. However, despite the increase, the debt remains manageable, as it is largely covered by the country’s foreign exchange reserves. The external debt-to-GDP ratio of 18.9% indicates that the level of external liabilities is moderate and sustainable.


 

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ACQ IAS