The Financial Stability Report released by the RBI a few weeks ago, highlights the external sector challenges being currently faced by the Indian economy. The report however seeks to dispel the fears of any balance of payment crisis like 2013. It also assures about the adequacy of reserves to handle the present situation and stability of the INR.
External sector facing challenges
India’s merchandise trade deficit increased to a staggering US$198.3bn during April-November 2022, as compared to US$115.4bn in the corresponding previous period. Strong headwinds emanating from still elevated commodity prices, global economic slowdown, volatile capital flows and higher imports due to adverse terms of trade shock continue to exert pressure on India’s external account.
Rising oil import bill limits policy flexibility; CAD rises sharply
India’s share in global crude oil consumption increased from 3% in 2000 to 5.2% in 2021. India presently accounts for almost 20% of each barrel of incremental global crude demand. Weakness in USDINR is further amplifying the pressure on imports.
Given the structural dependence on the imported crude oil, India continues to remain a price taker in the global oil market. This limits the scope of policy manoeuvrability in managing the trade deficit. Consequently, the current account deficit has widened to a worrisome 4.4% of GDP in 2DFY23 (2.2% in 1QFY23 2.2% and 1.2% in FY22).
Net capital flows were inadequate to fund the current account deficit, resulting in depletion of forex reserves to the extent of US$30.4bn in 2QFY23. The flows improved in 3QFY23, resulting in improvement in forex reserves.
Repayments of ECBs (rise in refinancing cost, withdrawal of liquidity in global markets, improvement in domestic corporate balance sheets) also contributed negatively to the balance of payment.
External debt situation comfortable
India had an external debt of US$610.5bn at the end of 1HFY23. The short term debt (residual maturity less than one year) comprised 45% of this debt. 55.5% of the external debt was USD denominated at the end of September 2022 (53.2% at the end of FY22); while 30.2% debt is INR denominated.
As of September 2022, about US$173bn worth of ECBS were outstanding with an average maturity of 5.6yrs. About 81% of all ECBs are USD denominated.
Out of this about 50% (US$87.6bn) were the USD loans owed by the Indian private enterprises; the rest being outstanding of subsidiaries of foreign parents (US$28.5bn); INR denominated ECBs (US$15.1bn); ECB by PSUs (US$53.2bn). Out of US$87.6bn Non INR, Non FDI ECBs, about 55% is hedged while most of the balance has a natural hedge against receivables.
Given the current Forex
reserve of over US$565bn, the external payment default risk is negligible; and so
is the collapse risk for INR.
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