India's record high $400 billion forex may have bolstered the Indian rupee but might flounder in the face of short-term debt that needs to be repaid in the next 12 months if the global financial markets tighten, though it may not be as bad as it was in 2013.
Nearly $200 billion worth of debt are coming up for repayment between June 2017 and June 2018, data from RBI shows. The total external debt is at $485.8 billion as at the end June 2017, which is more than the total reserves, making the external economy vulnerable.
"India's foreign exchange reserves are much higher than in the recent turbulent period of 2013 and able to buffer any potential outflows," said Saugata Bhattacharya chief economist at Axis BankBSE 0.08 %.
A lot of India's residual maturity short-term debt is not at high risk of creating volatility at the time of maturity. About half are trade credits, and a significant amount of the rest is rupee-denominated, nulling currency risk. While in general short-term debt is rolled over, the timing can create trouble if it coincides with any global financial markets turmoil.
In normal circumstance the rollover would be smooth, but if a Fed tightening roils the financial markets, that could lead to a 'sudden stop' of inflows, sparking currency volatility. The current debt includes short term trade credit as well as NRI deposits with residual maturity of up to one year.
Significantly, of the $199.5 billion debt, which comes up for maturity over the next one year, $80 billion are NRI deposits. Barring major events, NRI deposits get rolled over easily as overseas Indians find it profitable to keep funds in local deposits than in investments overseas where returns are poor.
"The situation is not alarmist. It is not a matter of immediate concern as short-term debt tends to get rolled over," said Madan Sabnavis, chief economist at Care Ratings."There could be an issue with NRI deposits, but a lot could depend on how the exchange rate moves."
Source: economictimes.indiatimes.com