External debt worth $256 billion matures over the next 12 months, according to the September data released by the finance ministry. This is about 43 per cent of the September external debt outstanding at $596 billion.
While the reserves still top $600 billion there could be short term pressures on the currency as the RBI is likely to temper its interventions rather than defend the currency.
The recent US consumer price inflation at 7 per cent at 39 year high, the Fed might be swifter in hiking rates than earlier anticipated that could result in higher pull out of dollars from emerging markets including India. “The expectation of a rate increase by the Fed and other advanced economies is likely to accentuate capital outflow, and this is likely to put pressure on the exchange rate, current account deficit and prices” said M Govinda Rao, chief economic advisor at Brickwork Ratings.
India is still in a comfortable position with reserves adequate to fund over 12 months’ imports and this short term debt is just about 40 percent of forex reserves then. ” Residual debt maturity is quite manageable in the current environment both in terms of composition and given our reserve position.” said Rahul Bajoria, chief India economist at Barclays Capital.
Though reserves position is comfortable compared to 2013, they may not grow as much, or as consistently, as they have in the last couple of years. “Of course, the impact may be less than that of the 2013 taper tantrum, but the pressure will be real,” Rao said. India added only $48 billion to its stock of reserves in 2021 compared to $124 billion in 2020.
Economists are also bracing for an overall balance of payments deficit after almost twelve quarters in March’22 if capital outflows surge as the current account is expected to widen further on rising crude and commodity prices. Moreover India faces a double blow with rising funding costs as interest rates are set to rise as also higher amounts of dollar funds as the capex cycle is set to pick up.
There would certainly be an impact on the way it would intervene in the forex market. “We believe the RBI may no longer continue have to absorb excess foreign currency inflows through intervention, but may at times need to sell reserves to stabilise the currency” , said Bajoria.
Corporates would be caught on the wrong foot in a situation of a volatile rupee with a downward bias, especially those who have not hedged their foreign currency exposure. ” From the RBI’s perspective, it could be actively monitoring hedging ratios of the corporate sector so that they are well covered” Bajoria said.
Last two years have been benign for the rupee. “But this year with greater volatility of the rupee you would want to make sure that corporates are not making losses just in case the rupee depreciates” said Rao