Re crash pushes up foreign debt by Rs 35,800 cr

Foreign loans of about US $ 84.12 billion is of long term nature and the depreciation of Indian rupee against the US greenback will have a cascading effect on the repayment obligation because there is no major cover on exchange rate fluctuations.

Naturally, this will upset all the projections made about fiscal deficit. Already the internal debt obligation of the government has reached very high level accounting for a major chunk of the revenue expenses in every budget.

While the foreign debt of the country remains steady in dollar terms, the steep fall in the value of the rupee has made the repayment an expensive proposition because when the repayment obligation comes the country will have to dole out more rupees to pay back dollar denominated loans. “In the case of our foreign debt, there is no cover or special reserves to account for the losses on account of exchange fluctuation,” said a senior RBI official who preferred anonymity.

On top of this, RBI Governor Bimal Jalan indicated that the current rate of the rupee (Rs 39.55) is reasonable. Jalan has made it clear RBI has no "target" for the exchange rate. “I have no target… I am not saying RBI will defend the rupee at certain level,” Jalan said. Forex market players who have already taken this observation seriously don’t expect the rupee to come back to the pre-August level of Rs 35.60. This means the additional debt repayment outgo will increase with further depreciation of the rupee.

The country has also lost heavily due to the steep decline in the international and domestic gold price because the RBI is holding part of its forex reserves in gold. The RBI maintains a separate Exchange Rate Fluctuation Reserve (EFR) as a precaution against depreciation or appreciation of rupee and gold value on the total forex reserve.

During 1996-97 there was a reduction of Rs 1,895.49 crore in the EFR bring the balance down from the Rs 11,976.42 crore (June 30, 1996) to Rs 10,080.93 crore as on June 30, 1997 mainly due to the steep fall in gold price causing a loss of Rs 1,509.70 crore.

Now the EFR has come under pressure due to the depreciation of rupee against the US dollar. According to the RBI annual report, an apreciation of US dollar against non-US currencies by one per cent will deplete the EFR by about Rs 227 crore and a one per cent fall in the gold price will result in erosion of the EFR by Rs 156 crore.

Due to the steep fall in gold prices the country has incurred a loss of Rs 3,600 crore to Rs 4000 crore in the last few months alone. As per the accounting policy followed by the RBI, about 30 per cent of the forex reserve is borrowed money.

According to a senior banker, the poor risk management by the authorities was evident last year when the government lost a whopping Rs 2,763.43 crore for meeting the FCNRA losses.

Since the government had agreed to bear the exchange rate risk liabilities relating to FCNRA deposits of various banks with effect from July 1, 1993, the cumulative loss suffered by the government on account of outflow of US $ 2,774.60 million under the FCNRA scheme was Rs 2,763.43 crore.

One cover against forex risk to park the borrowed funds in dollar accounts abroad, but as most of the borrowings are meant for immediate consumption or repayment of old loans, this cushion is not provided for government borrowings. Some PSUs and the private sector have opted for this route, but the government is asking them to bring back the funds parked abroad. This will further increase the repayment obligations.