Fiscal-policy / Fiscal Policy / Rupee Debt
Rupee Debt in India's External Debt
Rupee denominated debt is a significant component of India's total external debt, representing the portion that is denominated in the country's domestic currency, the Rupee. In the Indian context, rupee denominated external debt includes various instruments:
- Rupee Denominated NRI Deposits:
- These are deposits made by Non-Resident Indians (NRIs) in rupees.
- Foreign Portfolio Investors (FPI) Investment:
- FPIs can invest in Indian government securities and corporate debt. The government sets an annual investment ceiling for such investments.
- Masala Bonds:
- These are rupee-denominated bonds issued by Indian entities in the international market. The issuance allows them to raise funds in rupees from global investors.
Importance of Rupee Denominated External Debt:
Rupee denominated external debt is crucial for several reasons:
- Domestic Liquidity:
- It helps address the inadequacy of domestic liquidity by attracting funds from external sources in the form of rupees.
- Return in Rupees:
- The debt is returnable in the form of rupees, reducing the impact of currency fluctuations on repayments.
- Forex Reserves and Stability:
- The inflow of foreign currency into the country contributes to building up foreign exchange reserves, stabilizing the rupee.
- Currency Risk Management:
- Unlike foreign currency-denominated external debt (e.g., External Commercial Borrowing or sovereign bonds), where the borrower bears the risk of exchange rate fluctuations, in rupee-denominated debt, the currency risk is borne by the creditor.
- Stable Repayment in Rupees:
- Borrowers repay the borrowed amount with interest in rupees, regardless of the exchange rate, providing stability in repayment obligations.
Rupee denominated external debt plays a strategic role in managing liquidity, mitigating currency risk, and attracting foreign funds while ensuring stability in repayments in the domestic currency.
