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What India's high external debt means for the economy

The external debt figures stood at $557.4 billion as of June this year, as against $471.9 billion at the end of March 2017, as per RBI numbers.

October 04, 2019 / 09:48 PM IST

India currently boasts $429 billion in foreign exchange reserves, nearly an all-time high, according to an Indian Express report.

However, the country is still in a vulnerable spot with respect to external shocks. This is because of the widening gap in the forex cover vis-a-vis its rising foreign debt.

The external debt figures stood at $557.4 billion as of June this year, as against $471.9 billion at the end of March 2017, as per RBI numbers. This is almost a 20 percent rise in the debt figures within the past two years.

This is alarming because in the event of any shock, for instance, a sudden spike in oil prices, the economy would be exposed to risks.

The report noted that the increase in external debt in the recent past could be attributed to the liquidity crisis that hit the domestic market. As banks and NBFCs restricted lending to companies, they had to turn elsewhere, thus looking to foreign markets to raise funds.

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The report also highlights that even during the peak of the 2008 global financial crisis, India's forex reserves were well below the then outstanding external debt. The forex reserves at the time covered the country's external debt, providing a cushion in case of any unforeseen events.
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