Forex reserves slip below external debt after 7 years

After a gap of seven years, India’s foreign exchange reserve slipped below its total external debt during the quarter ending September 2010. Reserve power

After a gap of seven years, India’s foreign exchange reserve slipped below its total external debt during the quarter ending September 2010.

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At the end of the September quarter, India’s external debt stood at $296 billion, exceeding the country’s foreign exchange reserve by about $3 billion, according to a finance ministry report.

India was one of the few economies — besides China, Russia, Malaysia and Thailand — which has been maintaining more forex reserves than its total external debt. However, with spurt in external debt, especially in the quarter ended September 2010, the country's forex reserves fell below external debt, a position that it had maintained since 2003-04.

According to the finance ministry report, the country’s forex reserves worked out to be 99% of its debt at the end of September.

Quoting a World Bank report, the finance ministry said India was the fifth most indebted country in 2008 in terms of stock of external debt.

The increase in India’s external debt at end of September 2010 over March was mainly on account of higher commercial borrowings and short-term debt, which together accounted for over 70% of the total increase. In the first half of the fiscal (April-September), external commercial borrowings (ECB) rose by $10 billion to $82 billion. Also short-term debt increased by $13 billion in the first half to $66 billion at the end of September.

“Strong domestic demand along with rising interest rate differentials led to higher net inflows of commercial borrowings,” the ministry said.