What Does India’s Rising External Debt Mean for Investors?

How Has India’s External Debt Position Evolved in FY25?

About India’s External Debt Scenario

India’s external debt, which includes borrowings from foreign sources by the government, non-financial corporations, banks, and other entities, plays a crucial role in the country’s macroeconomic stability. At the end of FY25, total external debt rose to over $730 billion, marking an increase of more than 10% compared to $660 billion at the end of FY24. Despite this rise, the debt-to-GDP ratio remains moderate at 19.1%, underlining India’s ability to manage external obligations efficiently.

Key Drivers Behind the Increase

The Finance Ministry’s annual report highlighted that the valuation effect due to the appreciation of the US dollar against the Rupee and other currencies added $5.3 billion to the external debt. Excluding this, the actual rise in debt was $67.5 billion. The strong US dollar influenced the debt movement, contributing to a higher reported external debt as of March 2025.

Debt Vulnerability and Sustainability Indicators

India’s external debt vulnerability indicators remain benign. With the foreign exchange reserves to external debt ratio at 90.8%, the country is well-positioned to meet its obligations. Debt service payments arising from the stock of external debt are expected to trend downward in the coming years, highlighting long-term sustainability.

Debt Composition by Maturity and Borrowers

Long-term debt constitutes 81.7% of total external debt, while short-term debt accounts for 18.3%, mostly comprising trade credit for imports (96.8% of short-term debt). Non-financial corporations are the largest borrowers with $261.7 billion outstanding. Debt access is mainly through loans (34%), currency and deposits (22.8%), trade credits (17.8%), and debt securities (17.7%).

Major Creditors and Currency Breakdown

Commercial lenders account for the largest share of India’s external debt at 39.6%, followed by NRI depositors at 22.4%. The US dollar remains the dominant currency (54.2%), followed by the Rupee (31.1%), Japanese Yen (6.2%), SDR (4.6%), and Euro (3.2%). Concessional debt declined to 6.9% of total external debt, reflecting a shift towards market-based borrowing.

Debt in Rupee Terms and Economic Implications

In Rupee terms, external debt was estimated at ₹63 lakh crore at end-March 2025, a 13% increase over FY24. While rising external debt could raise concerns, strong foreign exchange reserves, a modest debt-to-GDP ratio, and favorable debt composition mitigate risks. The government continues to classify the current debt position as ‘modest,’ supporting investor confidence.

Impact on Business and Trade

Stable external debt and high reserves contribute to macroeconomic stability, supporting trade and foreign investment. A manageable debt profile ensures continued access to international financial markets, while low short-term debt exposure minimizes rollover risks. Businesses, especially importers and exporters, benefit from a resilient economic environment supported by sound external debt management.

Investor Takeaway

For investors, India’s external debt position indicates financial stability with limited vulnerability. Low debt-to-GDP ratios, high reserves, and long-term debt dominance provide comfort. Traders navigating volatile markets can make use of the following tips:
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Conclusion

India’s external debt has grown in FY25 but remains sustainable and manageable. Strong foreign exchange reserves, a favorable debt structure, and prudent government policies provide a solid cushion against external shocks. The focus on long-term debt, limited short-term exposure, and a high reserves-to-debt ratio make India resilient in the global economic landscape, assuring both domestic and foreign investors of financial stability.

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SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.

External Debt, India Economy, FY25, Debt-to-GDP Ratio, Foreign Exchange Reserves, Non-Financial Corporations, Commercial Lenders, Investor Tips