India’s external debt rose sharply by 10.7% to reach $717.9 billion by December 2024, up from $648.7 billion in December 2023. This growth reflects a combination of strategic borrowing for development and risks linked to currency volatility and global economic pressures. While the debt-to-GDP ratio remains manageable at 19.1%, the surge underscores both challenges and opportunities for India’s economic trajectory.

Drivers of India’s Rising External Debt

1. Infrastructure Financing Needs
   Non-financial corporations, particularly in infrastructure sectors, drove borrowing to fund large-scale projects under initiatives like the $1.4 trillion National Infrastructure Pipeline. Loans accounted for 33.6% of total external debt, reflecting demand for capital to support urbanization and industrial growth.
2. Currency Valuation Effects
   The appreciation of the US dollar against the rupee and other currencies (yen, euro, SDR) added $12.7 billion to India’s debt burden. Excluding this valuation impact, the external debt still increased by $17.9 billion in Q4 2024, indicating heightened borrowing activity.
3. Short-Term Debt Reliance
   Short-term debt rose to 19.4% of total external debt, up from 18.9% in the previous quarter. This trend signals growing dependence on short-term financing, which could amplify liquidity risks during global financial stress.
4. Global Interest Rate Pressures
   Tightening monetary policies in the US and EU narrowed the India-US bond yield spread to a 20-year low of 227 basis points, reducing foreign investor appetite for Indian debt. This complicates efforts to finance fiscal deficits, which stood at 6.4% of GDP in FY2024.

Key Risks to Economic Stability

1. Currency Depreciation: With 54.8% of external debt denominated in US dollars, rupee depreciation (₹84.48/USD) escalates repayment costs. A weaker rupee increases the burden of servicing dollar-denominated debt, straining fiscal resources.
2. Geopolitical Tensions: US-China trade disputes and tighter immigration policies threaten remittance inflows ($129.1 billion in 2024) and export revenues, critical buffers against external shocks.
3. Debt Servicing Costs: Annual interest obligations exceed $22.5 billion, diverting funds from social and infrastructure spending. Rising global rates could further inflate these costs.
4. Fiscal Deficit Concerns: India’s total debt-to-GDP ratio (including state liabilities) exceeds 80%, far above the FRBM Act’s 60% target, raising long-term sustainability concerns.

Opportunities and Mitigation Strategies

1. Forex Reserve Buffer
   India’s foreign exchange reserves cover 90% of external debt and provide 10.9 months of import cover, offering a robust shield against currency volatility and global liquidity crunches.
2. Diversified Capital Flows
   Stable FDI inflows and a narrowing current account deficit (0.7% of GDP in FY2025) strengthen external financing conditions. Renewed FPI inflows ($44.1 billion in FY2024) signal investor confidence.
3. Local Currency Transactions
   Promoting bilateral trade in rupees (already 30.6% of external debt) can reduce dollar dependency and mitigate exchange rate risks.
4. Green and Infrastructure Bonds
   Expanding green bond issuances and leveraging the infrastructure pipeline can attract sustainable investments while addressing funding gaps.

Long-Term Implications

• Growth vs. Stability Trade-Off: While borrowing fuels infrastructure development, excessive debt risks crowding out private investment and limiting fiscal flexibility.
• Sectoral Vulnerabilities: Stress in microfinance and NBFC sectors could spill over into broader debt markets, raising borrowing costs for small businesses.
• Global Integration: India’s debt market remains exposed to global rate hikes, necessitating prudent hedging strategies and diversification of funding sources.

Conclusion

India’s rising external debt reflects its ambitious growth agenda but also underscores vulnerabilities tied to global volatility and currency risks. While strategic borrowing supports infrastructure and economic modernization, managing repayment obligations and shielding the economy from external shocks will require calibrated policy measures. Strengthening export competitiveness, deepening domestic capital markets, and leveraging forex reserves will be critical to balancing growth aspirations with fiscal prudence in the years ahead.