Economics: Monetary Policy and Short-term Debt Zooms Essay

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1 Jan, 2011, 05.49AM IST,ET Bureau
Short-term debt zooms to $66 billion

NEW DELHI: The short-term debt rose sharply to $66 billion at the end of September, data released by the finance ministry on Friday showed.

This has raised concerns over rising hot money flow , but experts said the absolute amount was still within comfortable limits.

The total external debt also rose to $295.8 billion at the end of September , up 12.8% from $262.3 billion at the end of March.

“As of now it is within our comfort zone,” said Sunil Sinha, head of research and senior economist with ratings agency, Crisil . “The increase is partly a reflection of the large foreign institutional investment in debt that we have experienced since March.”

The share of short term debt in total external debt stood at 22.3% at the end of September against 20% at the end of March.

Foreign institutional investors had invested $5.4 billion in debt in the first six months of the current fiscal because of the attractive returns offered by Indian capital markets.

India and many emerging economies are faced with risks of large capital inflows because of the rising interest rate differential with the developed world where money is available at near zero interest rates.

“Strong domestic demand along with the rising interest rate differentials led to higher net inflows of commercial borrowings,” a finance ministry report said.

The government attributed the spurt in short-term debt to trade credit also.

“Short-term debt, led mainly by trade related credits stood at $66 billion, reflecting an increase of $13.5 billion over end-March 2010 level,” the report noted, adding that it was in line with increased imports associated with strong economic activity.

The other important debt sustainability ratio, the ratio of concessional debt to total debt, also deteriorated . It fell to 15.6% from 16.7% over the review period.

The rise in total external debt was largely on account of a spurt in commercial borrowings and short-term trade credit as the economy recovered . However, $6.3 billion increase was due to valuation reasons.

Only 53.9% of India’s debt is dollar denominated, leaving the balance to be converted into dollars for reporting. The depreciation of the dollar against other major currencies has led to rise in the non-dollar debt.

India’s foreign exchange reserves covered 99% of the external debt stock at the end of September against 106.4% at the end of March.

31 Dec, 2010, 04.49AM IST,ET Bureau
RBI report tags soft spots in economy

MUMBAI: The Indian financial sector, which weathered the credit crisis, faces headwinds as easy policies to avert the disaster led to some excesses, although stress tests show ‘reasonable degree of resilience’.

Rising bad loans, asset-liability mismatch at banks, widening current account deficit, hot-money flow, and fiscal deficit are among many factors that could shake the system, the Reserve Bank of India said.

“Some soft-spots are discernible,” the central bank said in its second Financial Stability Report. “The current account deficit is widening while capital flows continue to be dominated by volatile components. External sector ratios have deteriorated, fiscal conditions are still under pressure, and inflationary pressures persist.”

While the Indian banking system showed strength during the 2008 financial crisis unlike the developed nations, the easy policies adopted globally during the crisis are beginning to cause stress in the system. Gross domestic product growth is expected to be 9%, thanks to monetary and