India’s External Debt Metrics: Quiet Strength Beneath the Surface 06Oct25
Abbreviations used:
Forex Reserves - Foreign exchange reserves
RBI Reserve Bank of India
In the summer of 1991, India stood at the edge of an external payments crisis, with foreign exchange reserves barely enough to cover a few weeks of imports. More than three decades later, that memory still shapes how we evaluate the country's external sector health. But much has changed — and largely for the better.
As of June 2025, India’s external debt metrics show a story of quiet strength beneath the surface. Debt levels may have risen in absolute terms, but key external debt vulnerability indicators — such as the debt service ratio, forex reserves cover of imports and short-term debt risk — have steadily improved.
This blog takes a closer look at the latest data released by the Reserve Bank of India and walks through India’s long journey from fragility to relative resilience. From rising forex buffers to a declining share of short-term debt, the numbers tell a story worth unpacking.
A. Key terms explained
Before we delve deeper, let us define certain important terms:
1. External debt: It is total outstanding debt that India owes to foreign creditors — including governments, international financial institutions and private investors. (Public debt in India has various components: It basically consists of internal debt and external debt. Internal debt is borrowings from domestic sources, that is, within India. External debt is borrowings from outside India, that is, from foreign sources.)
India's external debt includes:
Sovereign borrowings (by Gov't of India)
Corporate borrowings from abroad
External commercial borrowings (ECBs)
NRI deposits
Short-term trade credit
Concessional debt
Note: Unless otherwise stated, debt here means external debt.
2. External debt to GDP ratio: The ratio of the total outstanding external debt stock to GDP is derived by scaling the total outstanding debt stock (in rupees) at the end of the financial year by the GDP (in rupees at current market prices or nominal GDP in rupees) during the financial year.
Interpretation of the ratio:
Higher ratio: Greater external vulnerability
Lower ratio: More manageable debt burden
3. Debt service ratio (or External debt service ratio): The debt service ratio is measured by the proportion of total debt service payments (that it, principal repayment plus interest payment) to current receipts (minus official transfers) of Balance of Payments (BoP).
It measures how much of India’s foreign exchange earnings are used to repay external debt.
Interpretation:
High ratio (>20%): Stress in the external sector / Balance of Payments
Low ratio: Comfortable repayment ability
The higher the external debt service ratio, the greater the burden for a country to service external debt; and the lower the ratio, the better.
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Related articles:
Brief History of India's 1991 Forex Crisis and Gold Pledge 17Jun2024
India Foreign Exchange Reserves Comfortable 10Nov2023
The Elusive Current Account Surplus: What 25 Years of Data Reveal About India's Trade Balance 30Jun2025
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4. Forex reserves to total external debt ratio: It is calculated by dividing forex reserves by total external debt. It indicates how much of India’s external debt can be paid off immediately using forex reserves.
Interpretation:
More than 100%: Reserves exceed debt – means, strong ability to pay off external debt using forex reserves.
Less than 70%: Forex reserves are much less than external debt, making a country vulnerable to external shocks, if any.
5. Short term external debt to forex reserves ratio: The ratio reflects a country's vulnerability to sudden capital outflows or currency depreciation. Short term debt here is of original maturity of one year and less.
In general, the lower the ratio, the stronger the ability to repay external debt in the short period of one year.
In general, if the ratio is higher than 30 per cent, a country is likely to face high liquidity risk on the external factor. Please note any single ratio needs to be interpreted in conjunction with other factors or ratios.
6.Short term external debt to total external debt ratio: Short term debt here is of original maturity of one year and less.
Interpretation: In general, the lower the ratio, the stronger the ability to repay external debt in the short period of one year. A higher proportion makes the debt profile riskier, as it needs frequent refinancing.
7. Import cover or Reserve cover of forex reserves: Import cover (in months) is calculated by dividing forex reserves with monthly average imports.
It denotes how many months of imports a country's forex reserves can cover, if forex earnings suddenly dwindle or come to a halt.
Suppose a country's import cover is 11 months -- it means its forex reserves can last upto 11 months of imports, even if it fails to attract any foreign exchange during the period.
Generally speaking, an import cover of less than three months makes a nation defenceless against external crises.
B. India's Key External Debt Vulnerability Indicators?
The following is a chart showing India Key External Debt Vulnerability Indicators >
The data in the chart are:
> As at the end of Jun.2025
> As at the end of financial year (India's financial year starts from April-March) from 2003-04 to 2024-25
> As at end of financial year for select years between 1990-91 and 2000-01
Please click on the image to view better >
Key observations from the above chart:
(a). Data as of Jun.2025:
India's total external debt is USD 747 billion, increasing slightly from USD 736 billion (Mar2025).
External debt to GDP ratio is 6.6 per cent. An external debt service ratio of 6.6 per cent is generally considered low and healthy for a major economy like India.
A ratio of 6.6 per cent means, India spent 6.6 cents of every dollar it earned from its current receipts to meet its principal and interest payments on external debt.
In short, a 6.6 per cent external debt service ratio indicates that India's external sector is stable and its debt burden is modest and manageable.
External debt to GDP ratio is 18.9, improving slightly from 19.1 (Mar2025).
Forex reserves are 93.4 per cent of total external debt, improving from 90.8 per cent in Mar2025.
Short term debt (original maturity of one year and less) to forex reserves ratio is 19.4 per cent, improving slightly from 20.1 per cent (Mar2025).
Short term debt (original maturity of one year and less) to external debt ratio is 18.1 per cent versus 18.3 per cent (Mar2025).
The latest available data for import cover is 10.5 months as of Dec2024, which is highly comfortable.
(b). Period between Mar2014 and Jun2025:
External debt increased by more than 65 per cent from USD 446 billion (Mar2014) to USD 747 billion (Jun2025), during the current tenure of PM Modi government.
But absolute figures won't tell the full story, which will be better explained by other metrics, such as, external debt to GDP ratio, debt service ratio, short term debt to forex reserves ratio and import cover.
Let us see how they stack up during this period >
- Debt to GDP ratio decreased from 23.9 to 18.9 per cent -- the drop in the ratio reflects stronger macro fundamentals, making India better positioned today to withstand external pressures than it was a decade ago
- Debt service ratio slightly increased from 5.9 to 6.6 per cent, even though it increased, India is in a comfortable position
- Forex reserves to total external debt ratio surged from 68.2 to 93.4 per cent -- indicating that the growth in forex reserves is much higher than that of total external debt -- making India less susceptible to external shocks, if any
- Short term debt to forex reserves ratio has decreased from 30.1 to 19.4 per cent -- showing great improvement in India's external situation, expanding India's ability to meet short term debt repayment
- Short term debt to total external debt ratio declined from 20.5 to 18.1 per cent, showing improvement
- Import cover increased from 7.8 months (Mar2014) to 10.5 months (Dec2024)
Overall, the PM Modi government, in the past 11 years, has been able to increase India's capacity to withstand exogenous shocks.
Possible Risks:
While India’s external debt profile has improved on many fronts, one troubling trend in recent years is the slowdown in Foreign Direct Investment (FDI) inflows (see Update 16Jun2025 with Charts 91 and 92 in Forex Data Bank for more data).
Foreign Portfolio Investment flows, especially in equity markets, too have been negative in recent years.
FDI is the most stable source of external funding, unlike foreign portfolio flows that can reverse abruptly.
Sluggish FDI weakens the foundation of the capital account and, by extension, forex reserves sustainability.
India’s ability to maintain a comfortable external debt position depends not just on how much it borrows -- but also on how much high-quality capital it attracts.
If FDI remains subdued and portfolio inflows become more fickle, the stability of the external sector — and by extension, the rupee and forex reserves — could be tested in a future shock.
(the article is still work in progress; and the same shall be completed in the next one to two years; please bear with me till then)
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References:
RBI press release 30Sep2025: India’s External Debt as at the end of June 2025
Ministry of Finance: India's External Debt: A Status Report 2024-25 (dated 08Sep2025)
RBI Annual Reports of various years
RBI Half-Yearly Report of Management of Forex Reserves of several years
Update 28Jun2025 with Chart 100 of Forex Data Bank: External debt vulnerability indicators
India Forex Reserves Comfortable 10Nov2023
Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and
opinion provided here are only for information purposes and should not be construed
as investment advice. Investors should consult their own financial advisers
before making any investments. The author is a CFA Charterholder with a vested
interest in financial markets.
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