External debt to GDP ratio at 12-year low; USDINR to trade between 81-84: ICRA

India’s external debt rose by $5.6 billion to $624.7 billion at end-March 2023 from $619.1 billion at end-March 2022. However, excluding valuation gains owing to a stronger $ vis-à-vis the INR and major currencies, external debt would have increased by a sharper $26.2 billion.

Importantly, external debt eased to a 12-year low of 18.9% of GDP at end-March 2023 (20.0% of GDP at end-March 2022). As a proportion of forex reserves, external debt dipped to 92.6% at end-March 2023 from 98.1% at end-March 2022, and was well above the 71.3% seen in end-FY 2013.

The share of short-term debt by original and residual maturity in total external debt witnessed an uptick in FY 2023. Moreover, the ratio of short-term debt to forex reserves increased slightly during the fiscal, implying a mild deterioration, despite the marginal increase in overall external debt.

With a sequential uptick of $15.7 billion in forex reserves, the coverage of external debt by forex reserves rose to 92.6% at end-March 2023 from 91.9% at end-December 2022. It is likely to remain at similar levels in Q1 FY 2024, amid a $14.7 billion increase in reserves in the quarter.

Outstanding commercial borrowings fell by 1.7% year-on-year (YoY) to $222.0 billion in FY 2023, owing to a decline in gross inflows amid a sharper rise in global interest rates vs domestic rates.  However, owing to the sharp rise in ECB approvals in the first two months of FY 2024, ICRA expects gross ECB inflows to rise to ~$30-35 billion during the fiscal from $26.0 billion seen in FY 2023.

While higher short term debt obligations impart vulnerability to India’s external position in FY 2024, the current account deficit is estimated to be moderate (CAD; to $71-73 billion in FY 2024). Additionally, continued FPI inflows as well as sizeable forex reserves are likely to provide a cushion.

Given the slowdown fears in the US economy, the DXY is unlikely to strengthen significantly, notwithstanding the expectations of a couple more rate hikes in the near term. Besides, the decline in crude oil prices and the moderate outlook for India’s CAD augurs well for the USD/INR pair. Overall, ICRA expects the INR to trade between 81.0-84.0/$ in Q2 FY 2024.