Rupee To See More Pain As External Debt Repayment Becomes Due

The rupee could experience further pressure as record external debt comes due for repayment over the course of this fiscal year and the following, and India's trade gap widens. The rupee fell to a new record low on Tuesday as a result of unabated withdrawals by portfolio investors amid tightening global monetary conditions.

The Reserve Bank of India (RBI) data showed that $267 billion, or more than 40%, of the total $621 billion in external debt, is due for repayment in the upcoming nine months. The amount of this repayment is about equal to 44% of India's foreign exchange reserves.

Ashhish Vaidya, MD, DBS Bank is quoted as saying in a leading business daily, "The current local macro setup is driven by a record current account deficit, primarily due to oil imports." He added, "Coupled with this, the overall dollar strength, triggered by higher US rate trajectory and risk-off sentiment, is contributing to rupee's rout."

Furthermore, Mr Vaidya has said, "It will likely come under more pressure amid the impending external debt maturities. In the next three to six months, this scenario can create more volatility before it starts stabilising with improving local and global macros," Vaidya said.

On Tuesday, a day after India reported a record trade deficit of $25.6 billion in June, up from $24.3 billion in May, the rupee plunged to a new record low of 79.38 to the US dollar. The price of the unit decreased by more than 0.5 percentage points to settle at 79.37 per dollar. The excess of imports over exports, or current account deficit, is predicted to reach 3.1 per cent of India's GDP, up from 1.2 per cent last year.

Additionally, the increase in economic activity that led to an increase in the volume of merchandise trade also caused a rise in short-term trade credit, which increased by almost a fifth over the course of the year. With leveraged investors locking in their gains, outflows might only increase as the US tightens monetary policy to control inflation.

Although there is currently enough foreign exchange reserves, the amount has decreased as a result of the RBI selling $41 billion since February to lessen the impact of record portfolio withdrawals.

A peak of $642.5 billion on September 3, 2021, was reached by the reserves, which were down to $593.3 billion as of June 24. Until July 4 of this year, records from NSDL, a depository, show that outside funds sold a net of $30.67 billion of Indian financial assets.