Hidden risks of India's hedged external debt

The recent real depreciation of the Indian rupee has been widely welcomed by commentators.

- PRASANNA TANTRI & SARATH RAMAKRISHNAN

The dominant narrative is comforting: A weaker real exchange rate improves export competitiveness, supports manufacturing, and provides a growth impulse amid global uncertainty. It is also argued that depreciation helps offset higher external tariffs faced by Indian exporters. In this view, the depreciation is not a prob-Jem but an opportunity. This narrative, however, overlooks an important aspect: The impact on borrowers of foreign currency debt. Ignoring it risks an overly comfortable macroeconomic interpretation and an underappreciation of key policy challenges.India’s total external debt exceeds $700 billion, with close to two-thirds owed by private financial institutions and non-financial corporations. A depreciation of the rupee raises debt-servicing burdens in domestic-currency terms. Assessments of vulnerability typically emphasise three mitigating factors: Borrower hedging, the adequacy of foreign exchange reserves, and the fact that external debt, at roughly 18-19 percent of gross domestic product (GDP), is low by international standards.