GS Paper - 3 (Economy)

A depreciating rupee and contracting foreign exchange reserves raised concerns about India's external debt position. As neighbours Sri Lanka and Pakistan grapple with an unprecedented economic crisis. However, data released by the Reserve Bank of India (RBI) showed that India's external debt situation is reasonably comfortable and it does not have economic problems like Sri Lanka and Pakistan.

What is external debt?

  1. When a country borrows money from foreign lenders through commercial banks, governments or international financial institutions, which is its external debt.
  2. A country can fall into a debt crisis if it is unable to repay the debt taken on time.
  3. It largely depends on the exchange rate between two economies, so risk persists.
  4. If the exchange rate depreciates in comparison to any foreign currency whose debt has been taken, there is a jump in the cost of servicing the external debt.
  5. As per the latest RBI data, India's external debt stood at $620.7 billion at end-March 2022.
  6. Valuation gains due to the appreciation of the US dollar vis-à-vis Indian rupee and major currencies such as yen, SDR2, and euro were placed at $11.7 billion.
  7. Excluding the valuation effect, external debt would have increased by $58.8 billion instead of $47.1 billion at end-March 2022 over end-March 2021. Currently, the forex reserves cover 95% of external debt.