First Time in 6 Years, Forex Kitty Lags External Debt As Private Loans Soar.

NEW DELHI: India's foreign exchange reserves fell short of covering its external debt for the first time in six years.

The ratio of foreign exchange reserves to external debt slipped to 99.6 at the end of March 2011, according the external debt status report released by the ministry of finance on Friday.

India's total external debt was $305.9 billion at the end of March 2010-11, a 17.2% jump over last year.

During 2010-11, the accretion to foreign reserves didn't match the rise in external debt, but even after a decline India ranks fourth among developing countries in terms of cover provided to external debt by foreign exchange reserves.

"The fall in reserves to external debt ratio is not a surprise at all as private borrowing have increased rapidly. However, payments will not be a problem for us as we are not in a danger zone," said DK Joshi, chief economist, CRISIL.

In terms of sustainability, however, India remains in a comfortable position as the debt service ratio and external debt to GDP ratio both declined to 4.2 and 17.3, respectively at the end of March 2011 from 5.5 and 18 a year earlier.

A lower debt service ratio means it's easier for the government to pay interest and principal on borrowings.

The government attributes the improvement in external indebtedness to prudent management policies.

"The main planks of which ( external debt management) are monitoring long and short-term debt, raising sovereign loans on concessional terms with longer maturities and regulating external commercial borrowings," it said in the report.

Another positive development was the increase in share of commercial borrowings from 19.7% in end-march 2005 to 28.9% in end-march 2011.

"The changing composition of debt in favour of commercial borrowing is also an indication of maturing market economy and the increasing role that corporate sector is playing in sustaining high growth rate", according to the report.

However, the share of short-term debt in total debt has been increasing consistently. On end march 2011, it was 21.2% up from 14% on the same date in 2006, with an increase of 24% just over the last year. A higher short-term debt threatens sustainability. Long-term debt increased by a lesser 15.4% between March-end 2010 and 2011.

"This rise in share of short-term debt is a worrying trend. More short-term debt increases risk," said Joshi.

Sovereign external debt remained at 25.6% of total external debt on end March 2011, similar to its share of 25.7% the year before.

In terms of currency composition, US dollar remained the predominant currency in external debt with a 53.5% share, followed by the Indian rupee, Yen and SDR. Therefore, a depreciation of the dollar contributed $6.5 billion to the increase in external debt, due to the valuation effect on debt held in other currencies. In the absence of valuation changes, external debt grew by 14%.

Source : economictimes.indiatimes.com