Debt Reckoning

New Delhi, July 6 -- "Debts are like children -

begot with pleasure, but

brought forth with pain."

- Moliere

The numbers are beginning to gain weight. Not merely on paper, but on the economy itself. India's external debt has climbed to $762.8 billion at the end of FY 2025-26, rising by $26.3 billion in a year and pushing the country's external debt-to-GDP ratio to 20.8 per cent, from 19.8 per cent earlier.

In another era, these may have remained distant macroeconomic figures tucked away inside Reserve Bank of India documents, discussed only by economists and policy specialists. But in today's turbulent global climate, debt no longer remains confined to balance sheets. It travels through currencies, markets, inflation, imports, corporate earnings and eventually into the everyday anxieties of ordinary citizens.

Today, India's debt position appears manageable for an economy of its scale, especially when compared to other nations burdened by heavy sovereign liabilities. Yet, beneath the statistical calm lies an uneasy reality shaped by a weakening rupee, strengthening US dollar, geopolitical instability, nervous investors and a global financial system that punishes vulnerability with unforgiving speed.

India is not in crisis. But it is entering a phase where external debt can no longer be dismissed as a dry statistic. It is becoming a strategic economic question, one that touches currency stability, investor confidence, inflation, corporate risk and India's room for manoeuvring in an increasingly uncertain world.

Dollar Dominance

The unapologetic reality is the overwhelming dominance of the US dollar in India's debt profile. More than 55 per cent of India's external debt is dollar-denominated, while the Indian rupee accounts for under 30 per cent. The rest is spread across the Japanese yen, SDRs and the euro. Does this matter? Yes, it does, enormously. Because every bout of dollar strengthening unforgivingly makes loan repayment in rupee terms more expensive. And the dollar has been exceptionally strong.

The RBI itself noted that valuation effects caused by dollar appreciation accounted for $24.6 billion of the increase in India's external debt during FY 2025-26. Tellingly, without these valuation effects, the jack-up in debt would have been a sharper $51 billion. That distinction is game-changing, because it reveals how vulnerable modern economies have become to global currency movements beyond their direct control.

For Indian firms borrowing abroad, every rupee weakening phase raises repayment burdens. For import-heavy sectors dependent on crude oil, electronics or machinery, depreciation raises the spectre of operational costs. For the economy, a falling rupee fuels inflation, subsidies and consumer prices.

The consequences are neither theatrical nor theoretical. The rupee's 10-per cent depreciation against the dollar has become a recurring theme during corporate earnings calls, with investors questioning companies about hedging strategies and forex exposure.

Shifting Pressures

The composition of India's external debt deserves scrutiny too. Loans remain the single-largest component, accounting for 34.7 per cent of total debt, followed by currency and deposits at 22.3 per cent, trade credit at 19 per cent and debt securities at 16.1 per cent. Significantly, the recent rise has been driven less by sovereign borrowing and more by private-sector debt. RBI data shows that non-financial corporations account for the largest share of India's external debt, at over 36 per cent.

This reflects an economy that is still investing, expanding and borrowing to grow. However, it also shows that corporate balance sheets are censoriously exposed to global volatility. The real concern lies elsewhere, though - in short-term debt. While long-term debt rose modestly to $613.5 billion, short-term debt grew faster, from 18.3 per cent to 19.6 per cent of overall debt. Its ratio to India's foreign exchange reserves also climbed, from 20.1 per cent to 21.6 per cent.

That may appear numerical, but markets understand the deeper significance. Short-term debt creates immediate repayment pressure. In times of global instability, refinancing such debt is costlier and riskier. A nervous global financial system rarely rewards emerging markets carrying rising short-term obligations.

Mind you, India's situation is far from alarming, given its sizeable forex reserves and comparatively healthy debt-service ratio. In fact, debt servicing as a percentage of current receipts has declined from 6.6 per cent to 5.8 per cent in FY 2025-26 - a sign that repayment capacity remains comfortable. But external debt sustainability is not judged by current comfort alone; it is judged by resilience during stress.

The Global Flight

The broader global climate is making that stress harder to ignore. Across the world, investors are gravitating towards safer assets, stronger currencies and higher-yield markets. US bonds are attractive, tech-linked investments still draw capital and geopolitical uncertainty is pushing investors towards dollar assets. Indian retail and corporate investors are joining this global sheep-walk.

As investors exchange rupees for dollars to fund their overseas investments, the demand for dollars rises and the rupee weakens. The cycle turns self-reinforcing. Export-oriented sectors may benefit for a bit from a weaker currency, but import-heavy sectors face rising costs, volatility and shrinking margins. This is why the RBI finds itself engaged in a tough balancing exercise. It has to manage inflation, maintain liquidity, defend currency stability and support economic growth amid intense external pressures.

Such interventions buy time. They do not eliminate structural pressures. Sure, India is not alone in facing this dilemma. Emerging economies across Asia, Africa and Latin America are battling the same reality, that of the global financial system principally remaining dollar-centric. The stronger the dollar becomes, the heavier external debt will feel for developing economies.

The Debt Debate

Should India worry? Yes. Is there need to panic? No. India's external debt-to-GDP ratio at 20.8 per cent is moderate by any standards. And it possesses substantial foreign exchange reserves, a growing economy and stable banking fundamentals. Recent RBI assessments have also projected resilience in the financial system despite the global turmoil.

Yet, complacency would be dangerous. The present trajectory underlines how enmeshed India is in global capital flows, imported energy and dollar liquidity. It also reveals the growing dependence of Indian corporates and investors on global markets for financing, returns and strategic positioning.

The Narendra Modi government's emphasis on domestic manufacturing, infrastructure and technology reflects an understanding of this challenge. After all, a country aspiring to become a major economic power cannot indefinitely remain vulnerable to every phase of dollar strengthening or every swing in investor sentiment. The issue is not the size of India's external debt. It is the quality of growth being generated alongside it. If borrowed money builds infrastructure, industries and export strength, debt becomes a tool of expansion. But if economic growth slows while debt rises and the currency weakens, liabilities deepen.

Taciturn Crossroads

India stands in a narrow passage between confidence and caution. Its economy remains among the world's fastest-growing. Its digital infrastructure, manufacturing ambitions and demographic scale continue to attract global optimism. But global finance has become unforgiving, volatile and brutally interconnected. External debt, currency pressures and investor anxiety can no longer be treated as isolated conversations.

The task before India is not to borrow wisely, but to reduce the compulsions that make dependence on foreign capital inevitable in the first place. That means deeper domestic manufacturing, stronger exports, tech competitiveness, energy security and resilience in the rupee. It means building an economy where growth is powered less by external vulnerability and more by internal strength. In the end, debt is rarely dangerous merely because it exists. It gets dangerous only when a nation begins losing control over it.

The writer can be reached on [e-mail]. Views expressed are personal

The writer is a veteran journalist and communications specialist

Published by HT Digital Content Services with permission from Millennium Post.