15.4 ndian onom
are unavoidable costs. The returns from rupee assessing liquidity requirements to service
assets are much lower compared to returns from them (within a year).
dollar assets. But RBI is not into investment International comparison of external debt
management, it is there to maintain stability in situation based on World Bank data shows
the system. that among the top 20 developing debtor
In August 2014, RBI chief Raghuram Rajan countries in 2016, India’s external debt
agreed foreign exchange reserves came at a cost. stock to Gross National Income (GNI)
India earns next to nothing for the foreign reserves ratio at 20.4 percent was the second lowest
it holds—actually, this way India finances another after China’s 12.8 per cent. In terms of
country when it has a significant financing needs. the foreign exchange reserves cover to
It is very difficult to state the level of reserves external debt, India’s position is the fifth
considered adequate by RBI. Though there are highest and India’s debt service rate is the
costs involved, the costs to benefit cannot be eight lowest. As per the World Bank data,
quantified by any model. Globally, there has been though India is the third largest debtor
no study on the adequacy of reserves. In such an country among developing countries
environment, RBI will have to go by experiences. (after China and Brazil), India’s share of
short-term debt to total debt is only 18.6
external Debt per cent (by end-June, 2017) compared
to 60.1 per cent for China (end-June,
As India started managing its balance of payment 2017).
in a more prudent way after the reform period, its
external debt position has also improved in a big
fixeD currency regime4
way. Major features (as per the Economic Survey
2017-18) of its external debt position during A method of regulating exchange rates of world
2017-18 (March-September) are given below: currencies brought by the IMF. In this system
By September 2017, India’s total external exchange rate of a particular currency was fixed
debt was at US$ 495.7 billion (5.1 per by the IMF keeping the currency in front of a
cent higher to the position of March, basket of important world currencies (they were
2017). UK£, US $, Japanese ¥, German Mark DM and
Long-term debt share was 81.3 per cent the French Franc FFr). Different economies were
(5 per cent increase) while the short- supposed to maintain that particular exchange
term debt was 18.7 per cent (5.4 per cent rate in future. Exchange rates of currencies were
increase). modified by the IMF from time to time.
Share of Government (sovereign) debt in
total debt was 21.6 per cent (19.4 per cent
floating currency regime5
increase). A method of regulating exchange rates of world
Forex cover to total external debt currencies based on the market mechanism (i.e.,
improved to 80.7 per cent (from 78.4 per demand and supply). In the follow up to the fixed
cent). currency system of exchange rate determination,
The ratio of short-term debt was 41.7 per 4. Ibid., pp. 610–11.
cent (from 41.5 per cent). Having idea of 5. Ibid., pp. 611–15.
this part of the external debt is useful in