India’s External Debt Metrics: Quiet Strength Beneath the Surface 06Oct25
Abbreviations used:
FDI Foreign Direct Investment
FPI Foreign Portfolio Investment
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.
Section 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
India Foreign Exchange Reserves in Four Charts 08Mar2022
The Elusive Current Account Surplus: What 25 Years of Data Reveal About India's Trade Balance 30Jun2025
Primer on Market Stabilisation Scheme (MSS) and Liquidity Management 02Dec2016
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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 runs from April 1st to March 31st) 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:
(1). 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.
This means that for every one dollar India earned through exports of goods and services (and other current account receipts), it spent just 6.6 cents to repay both interest and principal on its external debt.
Think of it like your personal finances:
If you earn Rs 100 a month, and your EMI is Rs 6.60, that’s not a big burden. It’s manageable and you still have plenty left over for other needs.
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.
Overall, it reflects prudent external debt management on India's part as of Jun2025.
(2). 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
- Declining debt to GDP ratio is a sign of strength. As GDP rises, even if external debt grows in absolute terms, the relative burden decreases. A declining debt-to-GDP ratio enhances investor confidence and strengthens India’s position with global credit rating agencies.
- 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 latest 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.
As can be seen from the above chart, as of Mar2013, forex reserves to external debt ratio was lower at 71.3 per cent, short-term external debt to forex reserves ratio is high at 33.1 per cent and forex reserves cover was enough for seven months.
A combination of these vulnerable indicators, Fed's taper tantrum and the twin deficit problem (both current account deficit and fiscal deficit were high during the last years of PM Manmohan Singh government) culminated in India's mini forex crisis in Aug-Sep2013.
Learning from the mini crisis, India started building up high forex reserves with a special window for attracting FCNR (B) deposits from non resident Indians.
And several other measures, like, increasing short term interest rates, imposing capital controls and curbing gold imports, too have been taken to steady the external ship.
(3). External Shock: 2013 Taper Tantrum:
India’s experience during the May2013 "Taper Tantrum" is a textbook case of an emerging market external shock triggered by a sudden shift in global expectations — and it exposed key vulnerabilities in India’s external sector at the time.
In May 2013, the US Federal Reserve hinted at tapering its bond purchases, triggering the "Taper Tantrum." This caused massive capital outflows from emerging markets, exposing India as one of the "Fragile Five" (alongside Brazil, Indonesia, Turkey and South Africa) due to its large current account deficit and heavy reliance on volatile capital inflows.
The Fed's Taper Tantrum immediately triggered massive capital outflows from emerging markets, including India. Foreign investors, fearing the reversal of cheap global liquidity, began aggressively selling Indian stocks and bonds, severely impacting the country's external finances.
India's large current account deficit (CAD), coupled with its reliance on volatile foreign funds, exposed it as one of the highly vulnerable Fragile Five economies. The rapid foreign currency exodus caused the Indian Rupee (INR) to depreciate sharply, driving up inflation and debt service costs.
To stabilisse the currency, the RBI had to heavily intervene by selling billions of dollars from its foreign exchange reserves, significantly depleting its financial buffer. The appointment of and new remedial measures of a new RBI governor in Sep2013 also resulted in stabilising India's financial markets to a great extent.
(4). Period from 1991 to 2001:
It was crazy to think India's forex reserves were enough to cover just three weeks as the end of Dec1990. A combination of political and economic factors led to a major forex crisis for India in 1991.
You can learn about the full story in this blog.
Coming back to the data from above chart, we can see that as of Mar1991, external debt to GDP ratio was very high at 28.3 per cent, debt service ratio was extremely high at 35.3 per cent, forex reserves to total external debt was abysmally low at 7 per cent and import cover was barely 2.7 months.
Even short term external debt indicators too were high, with short term debt to forex reserves was spectacularly high at 146.5 per cent, though short term debt was low at 10.2 per cent.
As delineated in the chart, these indicators have gradually improved in the next 10 years as India under the leadership of prime minister Narasimha Rao unleashed a wave of economic reforms between 1991 and 1993.
C. Don’t View Debt Indicators in Isolation: Why a Holistic View Matters
While each external debt indicator tells us something important, none of them—on their own—can capture the full picture of India’s external vulnerability or financial health.
Here's why a composite, big-picture view is essential:
Each metric has its limitations. For example, external debt to GDP ratio tells size of debt relative to the overall economic activity, but it doesn't tell the ability to repay or liquidity risk.
Debt service ratio gives a broad picture of debt repayment burden, but it does not inform you anything about long-term sustainability. Import cover denotes the external sector buffer, but is not linked to borrowing directly.
You wouldn't judge your overall health from just blood pressure or cholesterol alone. Similarly, we shouldn’t judge India’s external debt health from just one or two ratios.
Instead, it's the combined reading across all indicators—like strong reserves, manageable debt levels and low servicing burden—that signals genuine macroeconomic resilience.
D. Excess Reserves? The Problem of Plenty
In response to its historical vulnerabilities — particularly the 2013 Taper Tantrum and the volatile nature of capital flows — India has adopted a strategy of building large foreign exchange reserves as a buffer. Excess reserves come out with their own set of issues.
As of Sep2025, India's forex reserves are a little over USD 700 billion, including India's gold reserves.
India runs a persistent current account deficit and relies heavily on capital inflows, especially portfolio investments, to fund it. Since these flows can reverse abruptly during global shocks, the RBI has intentionally stockpiled reserves to defend the rupee and maintain external stability.
In effect, India is compensating for a structurally weak balance of payments profile by holding large reserves as insurance.
While large reserves reduce vulnerability, they are not without drawbacks:
1. Low returns: Reserves are mostly invested in safe, low-yielding assets like US Treasuries — yielding well below India's cost of capital. Rate of earnings from our foreign current assets (FCA) has been historically low.
However, during FY 2024-25, the rate of earnings increased to 5.31 per cent, which was a 24-year high due to a variety of factors (for data, see Update 01Jun2025 with Charts 80 to 81 of India Forex Data Bank).
2. RBI Gold Holdings: In recent years, the RBI has been steadily increasing its gold holdings as part of its forex reserves. As a result, gold now makes up a larger share of total reserves than it did a decade ago.
Between Mar2022 and Mar2025, the RBI gold holdings as a percentage of total forex reserves rose from 7.0 to 11.7 per cent. Conversely, it means income-earning assets share has been declining over the years.
This trend signals a deliberate shift in India’s reserve management approach, reflecting a preference for resilience over returns.
While this strengthens the diversification and safety of the reserve portfolio and acts as a hedge against global financial instability, it also comes with a cost in terms of returns. Mind you, gold does not earn any returns.
RBI is prioritising security, liquidity and stability over yield — a choice shaped by India’s past vulnerabilities and the uncertain global environment.
3. Sterilisation burden: Absorbing excess dollars into reserves requires the RBI to sterilise inflows by selling bonds domestically, which can impact liquidity and interest rates.
4. Fiscal cost: The central bank earns less on forex reserves than it pays out when absorbing rupee liquidity — creating an implicit fiscal burden.
India’s current policy leans toward erring on the side of caution — a response born from past episodes of trauma (1991, 2013). However, going forward, policymakers may need to strengthen the current account (via exports and energy security) and attract more stable FDI.
E. The Composition of Forex Reserves: A Hidden Vulnerability
While India’s foreign exchange reserves look comfortable on paper — covering over 90 per cent of external debt and providing 10+ months of import cover — it’s important to understand how those reserves are built. The source of reserves matters as much as the stockpile itself.
India typically runs a current account deficit (CAD) — meaning the country imports more goods, services and income than it exports. To finance this gap, India relies heavily on capital account inflows, such as, Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) and others like, External Commercial Borrowings (ECBs) and NRI Deposits.
This makes India’s forex reserves dependent on the confidence and sentiment of foreign investors.
In contrast, China consistently runs large current account surpluses — exporting more than it imports. This allows it to accumulate reserves through trade earnings, a much more stable and self-reliant mechanism.
China’s foreign exchange reserves are earned, while India’s are largely borrowed or invested.
Why This Matters:
Volatile capital flows (especially FPI) can reverse suddenly — as seen during the 2013 taper tantrum, COVID-19 Pandemic or 2022 global interest rate hikes.
India is thus more exposed to external shocks like crude oil price spikes, a strengthening dollar or global risk-off sentiment.
India’s external debt situation is stable and sustainable, meaning debt to GDP ratio is under control.
Debt servicing burden is low, indicating no strain on foreign exchange earnings.
Forex reserves remain strong relative to external debt, but keep in mind India's forex reserves are not strengthened by current account surplus, but by capital account. Any sudden foreign outflows from India could pose dangers to India's external sector.
One hopes the current central government would make sincere efforts to increase FDI flows to India, so that external sector remains stable without relying excessively on volatile capital flows. FDI flows are the Achilles' heel of PM Modi government in the past four to five years.
Short-term vulnerabilities are under control, as short-term debt indicators declined, but still need monitoring.
Import cover is adequate (historically above nine months in recent years).
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P.S.: Update 28Oct2025: The following chart is updated with data updated for import cover (as per RBI Half Yearly Report on Forex Reserves dated 28Oct2025) >
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)
DEA, Ministry of Finance - Various Reports on India's External Debt - annual Status Reports and quarterly reports
Screenshot with 35-year data on external debt metrics from the above Status Report >
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
US Tapering Is Postponed 19Sep2013
India Forex Reserves Comfortable 10Nov2023
Tweet 06Oct2025 - visual misrepresentation / distortion of data by manipulating (elongating) the Y-axis (with external debt to GDP ratio)
Screenshot of External Vulnerability Indicators from 2024-25 Annual Report >
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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