Chart of the Day | Past dollar loans come to haunt India at the worst time

India’s external debt is turning into a stiff bill at an unfortunate time. A massive $267 billion worth of debt is scheduled to mature in FY23, of which some part would have been by now.

What is more intriguing is that a large part of this pile is long-term debt taken many years ago. Ultra low interest rates in global markets during the past years lured Indian companies to raise money abroad. What followed was a growing pile of long-term dollar debt, which averaged a compounded annual growth rate of 28 percent over the last seven years.

Long-term external debt such as commercial borrowings, and foreign currency bonds typically have 5-7 years tenure. While long-term debt pile grew, short-term debt remained more or less at a steady state.

As the chart shows, the short-term debt taken during a year (having an original maturity of one-year) forms less than half of the total debt maturing this year.

Low interest rates, easy dollar liquidity and a need to expand may have prompted Indian companies to binge on dollar loans. That bill, though has come due at perhaps the worst time for the economy.

External debt repayment worries had gripped the Indian markets in 2013 as well, a time when the US Federal Reserve’s balance sheet tapering had triggered a meltdown in emerging markets.

The rupee had hit an all-time low at that time. Companies in the past have been known to secure refinance against dollar borrowings or even repay them without much challenges. That said, the impact on the exchange rate from such repayments would be adverse.