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Effect of dollar depreciation on India's external debt - increase or decrease?

Topic created · 8 Posts · 214 Views
  • India's external debt constitutes of 50% dollar liabilities, 36% rupee, rest yen, euro, sdr. If dollor weakens shoudn't our liabilities decrease? Earlier you were supposed to give back say 1$ = 70 Rs. Now with depreciation 1$ liability would be 65 Rs. Yen Euro etc might appreciate but given predomiance of dollar in total debt, overall effect shd be of decrease. But the rbi release (link given below) says due to dollar depreciation vis-a-vis other currencies, India external debt increased. Can anyone please explain this? Thanks

    https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR341816BAE7EE31054F7898D6209336FBEA11.PDF

  • @Charlie said in Effect of dollar depreciation on India's external debt - increase or decrease?:

    India's external debt constitutes of 50% dollar liabilities, 36% rupee, rest yen, euro, sdr. If dollor weakens shoudn't our liabilities decrease? Earlier you were supposed to give back say 1$ = 70 Rs. Now with depreciation 1$ liability would be 65 Rs. Yen Euro etc might appreciate but given predomiance of dollar in total debt, overall effect shd be of decrease. But the rbi release (link given below) says due to dollar depreciation vis-a-vis other currencies, India external debt increased. Can anyone please explain this? Thanks

    https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR341816BAE7EE31054F7898D6209336FBEA11.PDF

    •As far as i understood as the US $ depriciates, the external debt to be paid to countries other than US (other currencies ) will demand more US $'s i.e now debt should be cleared by paying more USD!
    •Forex Reserves to buy oil and other imports would be costlier in terms of $.

    I hope I'm on right direction. Let me know if it's correct seniours .

    😐

  • @Charlie
    Let's say total debt = Rs 10,000 and $1 = Rs 60 which implies total debt = $167
    Let the USD depreciate to the extent that $1 = Rs 59 which will imply a total debt of $169 (valuation effect of $2).

    What is being measured here is the total debt in dollar terms notwithstanding the ease of repayment. The latter would, of course, be visible in debt service payments.

    Hope that helps.

  • @albus I still have some doubts..

    Suppose India takes a debt of 50 mn USD at LIBOR in 2000. So, India has to pay back prinicipal+ interest in dollars and not in INR. So, if the dollar becomes cheaper, would not it be beneficial for India as it can buy dollars by paying less INR?

    What you are suggesting is that the debt has been denominated in INR and not USD. But, I think the debt are denominated in USD.

  • @albus said in Effect of dollar depreciation on India's external debt - increase or decrease?:

    @Charlie
    Let's say total debt = Rs 10,000 and $1 = Rs 60 which implies total debt = $167
    Let the USD depreciate to the extent that $1 = Rs 59 which will imply a total debt of $169 (valuation effect of $2).

    What is being measured here is the total debt in dollar terms notwithstanding the ease of repayment. The latter would, of course, be visible in debt service payments.

    Hope that helps.

    why are you calculating liabilities in rupees? if we have liabilities of say 1000$ it will continue to be 1000$ even as dollar's value changes. But yen, euro etc. would increase in dolllar terms. okay so perhaps that's where valuation effect is coming from. And rupee denominated debt's dollar equivalent would increase like if you had to give say Rs 140, your liability would be 2$, but if dollar deprciates to half, your liability increases to 4$. Okay, got it.

  • @AryaStark19 said in Effect of dollar depreciation on India's external debt - increase or decrease?:

    @Charlie said in Effect of dollar depreciation on India's external debt - increase or decrease?:

    India's external debt constitutes of 50% dollar liabilities, 36% rupee, rest yen, euro, sdr. If dollor weakens shoudn't our liabilities decrease? Earlier you were supposed to give back say 1$ = 70 Rs. Now with depreciation 1$ liability would be 65 Rs. Yen Euro etc might appreciate but given predomiance of dollar in total debt, overall effect shd be of decrease. But the rbi release (link given below) says due to dollar depreciation vis-a-vis other currencies, India external debt increased. Can anyone please explain this? Thanks

    https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR341816BAE7EE31054F7898D6209336FBEA11.PDF

    •As far as i understood as the US $ depriciates, the external debt to be paid to countries other than US (other currencies ) will demand more US $'s i.e now debt should be cleared by paying more USD!
    •Forex Reserves to buy oil and other imports would be costlier in terms of $.

    I hope I'm on right direction. Let me know if it's correct seniours .

    😐

    I think you are right, second point is immaterial though in calculating external debt.

  • @Charlie I dont think that makes much sense unless the prices of other currencies rise in comparison to USD. Only if other currencies say Yen appreciates to a level where they negate the gain accrued due to fall in prices of USD, then only this makes sense.
    Can someone throw more light on this?

  • Following lines have been copied from the RBI document--
    "At end-March 2018, India’s external debt witnessed an increase of 12.4 per cent over its level at end-March 2017, primarily on account of an increase in commercial borrowings, short-term debt and non-resident Indian (NRI) deposits. The increase in the magnitude of external debt was partly due to valuation loss resulting from the depreciation of the US dollar against major currencies. The external debt to GDP
    ratio stood at 20.5 per".

    I hope the bold parts clearly explains why there have been an increase.

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