The external debt of India has reached a record high of US$762.8 billion, increasing by US$26.3 billion from US$736.5 billion a year ago. But what exactly is external debt, and should people be worried? Let’s understand.
What is External Debt?
External debt is the total amount of money borrowed by India from foreign lenders. These lenders can include foreign governments, international organisations such as the World Bank, foreign banks, overseas investors, and companies based outside India. It is important to understand that India’s external debt is not only the Central Government’s debt. It also includes money borrowed by Indian companies, banks and other organisations from abroad.
External Debt-to-GDP Ratio Also Increased
India’s external debt-to-GDP ratio increased from 19.8% to 20.8% during the year. This ratio compares the country’s external debt with the size of its economy (GDP). A higher ratio means debt has grown faster than the economy. However, a ratio of around 21% is still considered manageable for a large economy like India.
Why Didn’t the Debt Increase Even More?
The RBI said the US dollar became stronger against the Indian rupee and many other currencies during the year. This had a valuation effect of US$24.6 billion.
In simple words, imagine India has borrowed money in different currencies such as the Japanese yen, euro and SDR. When these currencies become weaker against the US dollar, the value of those loans becomes smaller when converted into US dollars.
Because of this currency movement, India’s external debt appeared lower in dollar terms. Without this valuation effect, the actual increase in external debt would have been US$51 billion, not US$26.3 billion.
Long-Term Borrowings Increased
India’s long-term external debt increased to US$613.5 billion. Long-term debt refers to loans that have to be repaid after more than one year. These loans generally provide more time for repayment and are considered more stable than short-term borrowings.
Short-Term Debt Also Increased
The share of short-term debt, which has to be repaid within one year, increased from 18.3% to 19.6% of total external debt. The ratio of short-term debt to India’s foreign exchange reserves also increased to 21.6%. This means India has slightly more short-term repayments due than last year. However, the country’s foreign exchange reserves are still much larger than these short-term obligations.
Debt Due Within One Year Increased
The RBI also tracks debt based on residual maturity. This includes:
- loans originally taken for less than one year, and
- long-term loans that are now due for repayment within the next 12 months.
Such debt accounted for 42.9% of India’s total external debt at the end of March 2026, compared to 41.2% a year earlier. As a percentage of India’s foreign exchange reserves, this figure increased from 45.4% to 47.3%. This means a slightly larger share of India’s external debt will need to be repaid over the next one year.
Most of India’s External Debt is in US Dollars
More than half (55.5%) of India’s external debt is denominated in US dollars. The remaining debt is in:
- Indian Rupee – 29.4%
- Japanese Yen – 6.4%
- Special Drawing Rights (SDR) – 4.3%
- Euro – 3.7%
Because most debt is in US dollars, changes in the dollar’s value can significantly affect India’s external debt position.
Who Borrowed the Most Money?
The RBI said the Central and State Governments together reduced their external debt during the year. However, borrowing by the private sector increased. Among all borrowers:
- Non-financial companies accounted for the largest share at 36.4%.
- Banks (excluding the RBI) accounted for 26.5%.
- Government accounted for 22.0%.
- Other financial institutions accounted for 10.2%.
This shows that much of India’s external debt belongs to businesses and financial institutions rather than the government.
Loans Were the Biggest Source of External Debt
Loans continued to make up the largest part of India’s external debt at 34.7%. Other major components included:
- Currency and deposits – 22.3%
- Trade credit and advances – 19.0%
- Debt securities such as overseas bonds – 16.1%
This shows that traditional loans remain the main way India borrows money from abroad.
Good News: Debt Repayment Burden Reduced
One positive sign in the RBI report is that India’s debt service ratio improved. The debt service ratio measures how much of the country’s foreign earnings are used to repay external loans and interest. It declined from 6.6% in March 2025 to 5.8% in March 2026.
In simple terms, this means India is using a smaller portion of its foreign income to repay external debt than last year. This suggests the country’s repayment capacity has improved even though total external debt has increased.
What Does This Mean for India?
The RBI data shows that India’s external debt has reached a new high mainly because companies and financial institutions borrowed more from abroad. At the same time, the government’s share in external debt has declined.
While the increase in short-term debt means more repayments will be due over the next year, India’s debt repayment burden has eased, and the country continues to maintain strong foreign exchange reserves. Overall, the data suggests that although external borrowings have increased, India’s ability to manage and repay its debt remains comfortable.
