The Foreign Institutional Investors.
Ya'll Nibbiars FII inflows have been returning to EMs of late and India has been one of the recipients with net monthly inflows to India turning positive since June after strong outflows from March to May. In line, India has been piling up its FX reserves as buffer, without which the INR would have appreciated further. While further accumulation would depend on the strength of the USD contingent on ongoing fiscal spending by the US government, path of Covid-19 and associated global economic recovery and foreign inflows, the higher cushion provides stability to INR and credibility with foreign investors.
Figure 1: India’s increase in FX reserves has been one of the highest among EM peers.
In this context, And look at India’s external debt profile, the adequacy of its foreign reserves, how all this has changed in the last 15 years and various scenarios of reserve drawdown. Thrn explore this through a series of charts.
Figure 2: India's external debt has reduced from 24.2% of GDP in FY14 to 19.5% in FY20.
Figure 3: India's external debt growth has been mostly benign since late 2014, moving either closely or quite below June 2016 to June 2018 the growth in nominal GDP.
Figure 4: Seen differently, flow of external debt has slowed considerably. It fell by 61% during FY16-FY20 vs. FY11-FY15.
To further understand the dynamics of the slowdown in external debt, And need to understand how the long-term and short-term categories, and its constituents, moved over the years.
Figure 5: Looking at the split of long-term external debt by borrower/sector, the total flow during FY16-FY20 fell very sharply from FY11-FY15 for the financial sector to 36 Billion Dollats from 89 Billion dollars and the non-financial private sector to 8 billion Dollars from 48 Billion Dollars These two accounted for 68% of the long-term external debt outstanding in FY20. However, there was a revival in long-term external debt raised in FY20, led by the non-financial sector.
Then now break down the same long-term external debt into the two main categories.
Figure 6: The two main categories of long term external debt, commercial borrowing and NRI deposit, slowed. The former is in line with lower borrowing by the non-financial private sector seen above, while the latter was due to both lower oil prices from late-2014 to 2017 and the reversal of additional NRI deposits raised during the 2013 taper tantrum.
Unsurprisingly, short-term external debt which is primarily trade related 95% of the total is closely linked to the world export cycle. World export growth had contracted in 2015 and 2016 quite sharply in 2015, after which it rebounded in 2017 as the global economy witnessed a synchronised pickup in growth.
Figure 7: Short-term external debt flow also stayed weak all through FY14-FY17, but increased in FY18.
Then now look at the currency profile of India’s external debt.
Figure 8: Rupee denominated external debt share increased from 22% in FY14 to 36% in FY19, while USD-denominated debt fell from 61% to 51% during the same period. However, this trend reversed in FY20 as the share of rupee-denominated debt fell by 4ppts and that of USD-denominated debt increased by 3ppts. The reason for this - lower global interest rates, view of a weaker USD ahead, offsetting higher revenues in USD, etc. - is not entirely clear.
Figure 9: Consequent to the reduction in external debt, India’s external debt service ratio (defined as the ratio of external debt principal and interest payments to BoP current receipts) has slowed from its recent peak in FY16. The slight pickup in FY20 is in line with the revival of long-term external debt seen above.
Then also analyze how the adequacy of India’s foreign reserves, to cover short-term external debt and imports of goods and services, have moved.
Figure 10: India’s share of short-term external debt in FX reserves increased sharply from FY08 and doubled in FY13 as borrowing increased and reserves stayed low. This has gradually moderated thereafter as overall debt flow was lower and accretion of reserves much higher. The import coverage ratio has improved from a low of 6.0 in FY13 to 9.5 in FY20 and 10.6 in July 2020. It could further rise if import demand stays subdued, ceteris paribus.
Source: CEIC, Department of Economic Affairs, IMF, IDFC MF Research.
Note: 1 . Import coverage ratio is defined as the number of months of imports of goods and services covered by FX reserves.
2 . ST is ‘Short-Term’.