External debt worth $172 billion is due for redemption by March 2014, which could pose a challenge in the current environment where credit quality of Indian corporates is under stress due to the macro-economic conditions.
Indias net international investment position has deteriorated from -4% of the GDP in FY08 to -16.7% in FY13, as external liabilities have risen at a faster pace even as external assets, points out Nomura. Short-term residual maturity debt (excluding non-resident deposits) stood at close to 45% of total forex reserves a steep rise from a low of 16% seven years ago.
"This build-up of liabilities exposes the economy to rollover risks," said Nomura economist Sonal Varma in the report.
Nomura points out that during the US financial crisis of 2008-09, the average monthly drawdown in overseas bank loans stood at $2.4 billion. Over a period of 12 months, this added up to $28.3 billion. Short-term external debt saw a drawdown of $8.3 billion over a 12-month period during the financial crisis.
"In the past 10 years, the US and European financial crises were the only two instances where there was a significant fall in cross-border loans to India and Indonesia. The most significant impact in cross-border lending occurred during the US financial crisis, when India experienced a 12-month drawdown that totalled $28.3 billion or 10.6% of its FX reserves at the time," said the report.
Nomura expects net capital inflows to moderate due to a reversal in portfolio equity inflows and slower overseas borrowing by the private sector. Therefore, balance of payment pressures are likely to continue. The report predicts that the net capital inflows would be insufficient to finance the current account deficit. India received $96 billion of private gross capital inflows in FY13 versus USD75bn in FY12 and the entire increase was comprised of non-FDI flows, which tend to be very volatile.
"We expect these volatile net capital inflows to reverse over the next six months due to a number of triggers: QE taper, weak growth in India, rising India credit risk and slowing reform momentum as the political cycle heats up," the report said.
Varma also noted that the policy response to the currency weakness thus far has not been satisfactory. The government and the Reserve Bank of India have announced a slew of measures over the last few months to control the fall in rupee, with barely any results. Nomura says that they will now have very few options at hand, going ahead.