India is unlikely to face an external financial crisis

 

Is India likely to face a financial crisis

Forex Reserves: No doubt high level forex reserves has given the buffer to India to manage any external crisis arising out of maturing external liabilities/ repayment of interest/ principal  towards external debt.

The following evidences that:

1. Forex reserves, which was just 7% in 1991 (and  was less than 50% till 2001) of the total external debt, now covers 97.8% of total external debt standing at USD 620.7 billion as on 31.03.2022

2. Current forex reserves is equivalent to cover 49% of total external liabilities (USD 1197.6 billion) and gives a great level of collateral comfort.

3. Forex reserves are also adequate to cover more than 10 months of imports, again a state of mental comfort.

4. High level forex reserves also played  a major role in keeping the currency of the country, with a high current account deficit, within a range.

Other comforting factors: However, it should be mentioned that there are some other factors as well, which helps India to prevent any external crisis, (inspite of high fiscal deficit at record levels), that hit our neighbouring countries like Sri Lanka, Pakistan, Nepal and Bangladesh.

a. India's external debt to GDP at 19.9% is less than many other countries.

b. The govt.  debt in the total external debt works out to just  4.2% of GDP

c. NRI deposits, where inflows and roll overs are perennially higher than outflows, works out to 23% of external debt.

d. Debt Service (Principal repayments plus interest payments) declined to 5.2% in Mar 22 as compared to 8.2% in Mar 21.

e. Even ad FPIs are permitted to hold 6%/2% of the outstanding central/ state government securities, majority of government borrowings, by way of issue of debt securities,  is still raised from domestic investors. The share of FPIs in the g-sec, comprising central/ state/ treasury bills, is just 2% of the total  outstanding securities.

Conclusion:  Gross government debt to GDP is at 89.6% (as per IMF estimates);   Fiscal Deficit to GDP is likely to be higher only in the near term. But still, India may not face any external crisis mainly due to its current forex reserves position, relatively low level of external debt due from the Indian government and the NRI component forming nearly one fourth of the external debt. However the value of rupee is bound to be under constant threat, due to higher current account deficit and volatile fluctuations in the prices surrounding the commodities, we import.

Regards

V. Viswanathan

28th August 2022

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