India's External Debt Climbs, GDP Ratio Ticks Up

Synopsis

The Reserve Bank of India data shows India's external debt increased to $762.8 billion at the end of March 2026, from $750.5 billion at the end of March 2025, putting the debt-to-gross domestic product (GDP) ratio at 20.8% at the current level, up from 19.8% a year earlier. The bulk of the rise was due to dollar appreciation and non-government borrowing, despite lower costs of servicing debt and continued dominance by long-term debt in the portfolio.

Debt Stock Widens as Corporate Borrowing Rises

India's external debt rose marginally in the last fiscal year, raising concerns about the country's dependence on foreign debt, despite its own government calling the current situation "manageable".

The Reserve Bank of India on Monday released data on external debt, which shows that the country's external debt was up $26.3 billion at end-March 2026 compared with the previous year's figure at end-March 2025.

The external debt to GDP ratio increased to 20.8 per cent at end-March 2026 from 19.8 per cent at end-March 2025.

Notably, the government's outstanding debt shrank while that of non-government entities grew – again, reflecting higher dependence of the private sector on foreign funding despite the reduction in government borrowing, the central bank said in its statement a year ago.

The Dollar Effect

Much of the increase in the headline figure is actually due to currency movements and not to new borrowing. Part of this rise in external debt was due to valuation effects, which were the result of a flight of the US dollar against the Indian rupee and other major currencies, and amounted to $24.6 billion for the year.

Outside debt, excluding the valuation effect, rose by $51.0 billion, more than double the reported gain, suggesting that the gain in the actual level of borrowing was less than the reported rise.

The composition and currency exposure

The share of the US dollar in external debt composition of India remained the highest at 55.5 per cent while the Indian rupee was at 29.4 per cent, Japanese yen at 6.4 per cent, SDRs at 4.3 per cent and euro at 3.7 per cent at the end of March.

Among the sectors, the share of non-financial corporations in debt outstanding was the highest, accounting for 36.4 per cent, followed by that of deposit-taking corporations (26.5 per cent), general government (22.0 per cent) and other financial corporations (10.2 per cent).

Debt Servicing Eases, Short-Term Risk Rises

The current debt burden eased despite the increase in debt. Debt service, which includes debt principal repayments and interest payments, fell to 5.8 per cent of current receipts at end-March 2026 from 6.6 per cent at end-March 2025.

Vulnerability indexes also inched up, however, as the ratio of short-term debt to total external debt rose from 41.2 per cent a year ago to 42.9 per cent, while the ratio of short-term debt to foreign exchange reserves increased from 45.4 per cent to 47.3 per cent.

A Controlled but Monitored Flight Path

The data watchers say the increase is significant, but not yet alarming. While the ratio has been climbing, the economists say it is not alarming as India continues to have huge foreign exchange reserves, and most of the debt is long-term.

Although, India's nominal GDP was lower than expected, and the Union government's debt-to-GDP ratio could be at 57.85 per cent for FY26, compared with 56.1 per cent projected in the Union budget — and this highlights the difference between external and domestic debt ratios, both of which are influenced by the speed of India's underlying GDP growth rate.

Capital flows from abroad are being influenced by the dynamics of interest rates and currency volatility across the globe and India's modest external debt ratio is a relatively comfortable stance, one that will be maintained by policy makers.