External debt of over half a trillion dollar poses a threat to rupee

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Mumbai: The Indian Rupee faces a new threat – soaring external debt. India’s external debt, the amount money Indians have to repay in US dollars and other foreign currencies, have soared past the half a trillion mark that may begin to worry investors about the strength of the currency.

That more than half the amount owed is coming up for repayment in the next year is a bigger cause of worry for investors and could lead to volatility in a market that is already getting whipsawed by the global trade wars and normalisation of interest rates in the developed world after a decade.

At first the situation may not appear to be in a crisis state as it was in 2013 when the currency was pummelled, absence of corrective measures could see Indian financial markets witness wild swings.

“The Indian rupee has clearly underperformed other EM currencies in 2018 so far and is down 2%,’’ said Tanvi Gupta, India economist at Swiss Investment Bank UBS. “Our analysis indicates that while India remains vulnerable in its external position and risks are rising on the margin.”

India’s external debt crossed half a trillion mark to touch a record $513.4 billion as of December 2017, data from the RBI shows. Record forex reserves at over $400 billion is just 79.7% of the total external debt with about 53% of debt coming up for maturity in the next one year. Current account deficit, the excess of spending overseas than earning, has about doubled to 2 percent of the Gross Domestic Product in December. 2017.

“While the Indian currency still seems to be holding up quite nicely against the US dollar, it has depreciated against the other major currencies in the world” said Mahesh Nandurkar, India strategist at CLSA in an interview to ET. “I don’t really see things changing unless we begin to see an earnings upgrade cycle or the corporate earnings improving in a very meaningful way, which as of now looks a low probability event”

Soaring foreign debt and a deteriorating currency account brings back memories of a currency crisis in 2013 after Federal Reserve Chairman Ben Bernanke signalled `tapering’ of bond purchases. But the high reserves and a better macro numbers could save the day.

“It’s true that current account deficit has widened and external debt has increased. However, the story is not as alarmist as in 2013” said Anubhuti Sahay, chief Asia economist, Standard Chartered Bank. “Continuance of measure to reduce inflation and fiscal slippages on a sustained basis along some export promoting measures can keep confidence in India fundamentals intact.”

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