Rise in India's External Debt

• 08 Oct 2025

Source: ET 

Why in News ? 

India’s external debt has risen to USD 747.2 billion at the end of June 2025, marking a 1.5% increase over the previous quarter, as per the latest data released by the Reserve Bank of India (RBI).  

What is the Current Status of India’s External Debt? 

• Valuation Effects: The increase in external debt was largely driven by valuation effects arising from currency fluctuations. 
  • The depreciation of the US dollar contributed to a valuation loss of USD 5.1 billion. 
• Debt Coverage: Despite the increase in total external debt, over 93% of the debt is covered by India’s foreign exchange reserves, ensuring strong external resilience. 
  • The external debt-to-GDP ratio stands at 18.9%, reflecting a moderate and sustainable level of external liabilities. 
• Debt Maturity Profile:  
  • Long-term debt (maturity over one year) forms the bulk at USD 611.7 billion, while short-term debt declined to 18.1% of total debt. 
    • The short-term debt-to-reserves ratio has improved, reducing rollover and liquidity risks. 
• Currency-wise Composition 
  • US Dollar: 53.8% – The dominant currency in India’s external debt, showing significant exposure to global monetary fluctuations. 
  • Indian Rupee: 30.6% – A substantial share in domestic-currency debt. 
  • Japanese Yen: 6.6% – A minor share. 
  • Special Drawing Rights (SDRs): 4.6% – A minor portion. 
  • Euro: 3.5% – A relatively smaller share. 
• Sector-wise Distribution 
  • Non-financial Corporations: 35.9% – The largest sector, reflecting the rise in private-sector external borrowings. 
  • Government & Financial Institutions: The remaining share of the external debt.

External Debt  

• About: External debt refers to the funds borrowed by a country from sources outside its borders.  
  • These sources include foreign commercial banks, international financial institutions like the International Monetary Fund (IMF) and the World Bank, as well as the governments of other nations.  
  • It can be denominated in foreign currency or domestic currency, depending on the agreement. 
• Key Features: 
  • Liability to repay: Includes principal and interest. 
  • Currency exposure: If borrowed in foreign currency, repayment depends on exchange rates. 
  • By sector: Can be owed by government, financial institutions, or private corporations. 
  • By instrument: Includes loans, trade credits, bonds, deposits, etc.

What are the Key Challenges Associated with Rising External Debt? 

• Exchange Rate Risk: As external debt is often denominated in foreign currencies, fluctuations in exchange rates can increase the repayment burden, making it more expensive to service the debt. 
• Interest Burden: Rising debt increases interest obligations, putting pressure on fiscal resources and reducing funds for development. 
  • Prolonged inflation can lead to higher interest rates, which in turn slows economic growth. This can result in an increased external debt-to-GDP ratio, putting further pressure on the economy. 
• Vulnerability to Global Shocks:  The global threat of stagflation could reduce demand for India’s exports, negatively impacting the debt service ratio and further complicating debt repayment. 
• Crowding Out Domestic Investment: Debt servicing may divert resources away from productive domestic investment and welfare spending. 

What are the Key Measures to Manage External Debt? 

• Diversify Currency Exposure: Reduce reliance on foreign currencies like the US dollar by promoting the use of local currency for external borrowing, such as rupee-denominated debt, to mitigate currency risks. 
• Adopt Sustainable Debt Practices: Ensure that borrowed funds are directed towards productive investments, such as infrastructure and development projects, rather than consumption, to generate long-term economic returns. 
• Extend Loan Maturities: Opt for long-term loans to spread the repayment burden over an extended period, reducing the immediate pressure on finances. 
• Strengthen Fiscal Policies: Implement robust fiscal policies that focus on reducing deficits, controlling inflation, and ensuring economic stability, which in turn reduces external debt vulnerability.

Drishti Mains Question:

Examine the challenges and propose strategies for achieving sustainable management of public debt in India.

Frequently Asked Questions (FAQs) 

1. Which component dominates India’s external debt? 
US dollar-denominated debt forms the largest share (53.8%), followed by rupee (30.6%), yen (6.6%), and euro (3.5%).

2. What ensures India’s external debt sustainability? 
Over 93% forex reserve cover, long-term maturity structure, and a moderate debt-to-GDP ratio, ensure resilience. 

UPSC Civil Services Examination, Previous Year Question (PYQ) 

Q. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (2020) 

(a) It is the investment through capital instruments essentially in a listed company.  

(b) It is a largely non-debt creating capital flow.  

(c) It is the investment which involves debtservicing.  

(d) It is the investment made by foreign institutional investors in the Government securities. 

Ans: B

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Mains

Q. Public expenditure management is a challenge to the Government of India in the context of budget-making during the post-liberalization period. Clarify it. (2019)