On Monday, the Reserve Bank of India (RBI) released its Annual Statement detailing India’s external debt position at the end of March.
On the face of it, the country’s overall position is satisfactory. External debt at the close of fiscal 2025-26 stood at $762.8 billion, an increase of $26.3 billion over the level recorded at the end of 2024-25. In percentage terms, it was up by one percentage point to 20.8% of GDP.
However, a reading between the lines shows that not everything is hunky-dory. The relatively modest increase in absolute terms is deceptive. It hides a valuation effect worth $24.6 billion due to the US dollar’s appreciation vis-à-vis the Indian rupee and other major currencies.
That’s almost as much as the increase in overall debt. If that effect is taken into account, India’s external debt would have increased by $51 billion, almost double the amount.
That is not the only cause for worry.
When one looks at external debt, what matters is not just its quantum, but also its maturity profile. And here the news is not so good. At $11.6 billion, the increase in long-term debt (with original maturity of above one year) during 2025-26 is less than half the increase in overall debt, which suggests a worsening of the burden’s maturity profile.
As a result, short-term debt (by original maturity) as a proportion of foreign-exchange reserves increased to 21.6% at the end of 2025-26 from 20.1% at the end of the previous year.
That is not all.
A proper assessment of the country’s external debt position must go beyond categorizing debt as short and long-term based on the original maturity when it was taken.
It must look at ‘residual maturity,’ or obligations that include long-term debt by original maturity falling due over the next 12 months plus short-term debt by original maturity.
And here again, the data is somewhat disquieting. This figure was 42.9% of total external debt at the end of 2025-26, up from 41.2% a year earlier. As a share of India’s forex reserves—the more relevant parameter—it stood at 47.3%, or closer to the halfway mark than 45.4% at the previous year’s close.
Given that forex reserves fell from $688.1 billion for the week ended 27 March 2026 to $672.6 billion during the week ended 19 June, this ratio is likely to have worsened.
RBI’s calculated gamble to attract more forex flows to shore up its reserves and strengthen its armoury to intervene against what it calls ‘excessive’ depreciation of the rupee—regardless of the cost borne by domestic taxpayers—must therefore be understood in terms of the central bank’s desire to improve this ratio as well.
On paper, RBI’s recently unveiled package of measures will add to reserves but not short-term debt, since it includes foreign currency non-resident (FCNR) deposits and external commercial borrowings with maturity of more than one year.
But it could still end up as a double-edged sword. If US interest rates rise relative to ours and there is an adverse change in risk perceptions of India, even if driven by the vagaries of geopolitics, one cannot rule out premature closures of FCNR deposits.
Which brings us back to a time-tested lesson. Flows of hot money are not the best way to boost reserves over the long-term. They can, at best, buy time. India has long had a relatively modest exposure to foreign repayment obligations.
That has not changed, but the superficial gloss of our latest external debt numbers must not blind us to underlying risks.