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 to and the reversal of additional NRI deposits raised during the taper tantrum. World export growth had contracted in and quite sharply in , after which it rebounded in as the global economy witnessed a synchronised pickup in growth.

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. The slight pickup in FY20 is in line with the revival of long-term external debt seen above. 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. It could further rise if import demand stays subdued, ceteris paribus. Note: IMF Assessing Reserve Adequacy ARA metric is derived using weights to cover exports potential loss of export income and liquidity stress on banks , broad money risk of resident capital flight , short term debt debt roll-over risk and other liabilities risk of non-resident debt and equity capital flight.

The weights differ based on the exchange rate regime fixed or float of an economy. This is not to suggest any potential drawdown but is essentially a stress-test of the cushion available in the event of a capital flight.

Note: 1 Short-term debt is based on residual maturity, 2 IMF ARA is IMF Assessing Reserve Adequacy metric, 3 For the latest actual situation, import and current account numbers are taken as at end-March while FX reserves are taken as at end-July and 4 In all the scenarios, we assume any FX intervention in sterilised and therefore does not impact money supply. This slowdown has been led by both the financial and non-financial private sectors in the long-term segment.

In line, both external commercial borrowings and NRI deposits have slowed. Short-term debt flow, mostly trade-related, picked up in as world exports rebounded but has been flat thereafter. In terms of currency denomination, we see the increase in rupee-denominated debt since FY15 reversed partially in FY The forex reserves pile got bigger and bigger. However, in this financial year, the equation has changed.

Foreign investors are seeking a safer haven in US treasury bonds. This situation is exacerbated by the Fed and other OECD central banks gradually withdrawing their easy money policy. Remember, this easy money at near zero interest was flooding the Indian tech and green energy sectors in , adding massively to forex reserves.

That honeymoon is all but over. Also read: How the Rise of Global Inflation Will Play Out in Indian Politics Capital inflows will slow sharply in and the trade deficit will nearly double, going by present trends. To be balance of payments neutral, India would need net capital inflows of this magnitude. Is that feasible in the next 10 months, when most large central banks are withdrawing easy money?

Most economists predict a negative balance of payments.

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