The external debt data released by the RBI for end June 2011 throws up some disturbing numbers. Debt of USD 137 billion is coming up for maturity in the next one year and if current conditions persist, the roll over of the debt will cause pain for the borrowers.
RBI data shows that short term debt maturing in the next nine months (data is of June 2011 and three months have since passed) is 43% of the total external debt of USD 316.9 billion. NRI deposits of USD 43.4 billion account for 32% of the total short term debt of residual maturity of less than one year. FII investment in sovereign debt of USD 5 billion and ECB (External Commercial Borrowings) of USD 20 billion are coming up for maturity in the next nine months. The rest of the short term debt of residual maturity of less than one year of USD 68.4 billion includes short term trade credit of USD 61 billion.
The current conditions where the Indian Rupee has depreciated by over 10% against the USD in the last couple of months and the rise in credit spreads in Indian USD bond issuers such as ICICI Bank by over 100bps in the last few months has placed a stress on USD funding of domestic borrowers. Hence the maturity of short term debt of USD 137 billion in the coming nine months should worry markets.
In normal times when there is low volatility in currency and credit spreads, roll over of short term debt will not be an issue. NRI deposits tend to get rolled over without a fuss, as are trade credits. However, in times of currency and credit spread volatility when the USD is strengthening across all currencies, even normal roll overs of debt can cause issues as depositors and lenders hold on to USD in the face of market turmoil.
If short tem debt does not get rolled over, the borrowers have to tap INR market for liquidity. Liquidity is tight in India with the tight monetary policy of the RBI forcing banks to access the RBI window for funds on a daily basis. Banks are borrowing over Rs 60,000 crores from the RBI everyday to fund their liquidity needs. Domestic banks, facing reluctance by NRI depositors to roll over deposits will have to aggressively raise deposit rates to maintain liquidity. Cost of funds in the system goes up leading to a rise in cost of borrowing in the economy.
The markets sense opportunities in times of distress. If markets do perceive that roll over of short tem debt can cause problems, it will take down the Rupee against the USD causing further distress in the external debt situation. It can lead into an ugly self fulfilling cycle of perceived threat of short term debt leading to Rupee weakness and further hurting sentiments on short term debt.
The fact that India is in a situation where 43% of the total external debt is coming up for maturity in the next one year is a big worry. The primary cause of currency volatility in currencies is short term debt. The Asian countries such as Thailand, South Korea, Indonesia, Philippines and Malaysia that have faced extreme currency volatility will vouch for this fact. The government in its attempt to shore up a flagging equity and debt market is encouraging short term flows into the country by increasing debt limits as well borrowing limits for corporates. Higher limits in good times will bring in flows but in bad times will only exacerbate the situation leading to a larger than expected currency volatility.
RBI must highlight the threat of maturing short term debt to all borrowers and take steps of bring it under control.