If the 10 year RBI data on short term foreign debt is analyzed, it is fairly obvious that the UPA destroyed the value of the Rupee. In 2004 when the Vajpayee Government was voted out, the foreign debt at $ 112.4 billion was well covered by the forex reserves. Nine years later it has grown by 350 percent to $ 390 billion and the forex reserves cover falls 25 percent short.

However the rise of foreign debt is not the only reason why the Rupee collapsed from Rs 39 to a dollar to Rs 61 for a dollar during the intervening period. Foreign debt is a necessary evil that is needed by developing countries to push forward their needs to fund foreign capital funded infrastructure. Usually such addition of infrastructure results in long term asset building that adds to improved productivity of the nation. However in India’s case the rise of external debt has been primarily to fund the current account deficits catering largely to the working capital needs and funded through the short term loan at higher interest rates. This short term debt component was very comfortable at just 3.9 percent of the Forex reserves when the NDA was voted out of power nine years ago. By 2009 when the UPA II was re- elected it was around 17.2 percent and by March 2013 the short term external debt rose to a whopping 33.1 percent of the Forex reserves which had fallen to $ 292.65 billion. With the reserves further dropping to $ 280.18 billion following RBI’s intervention to stem the Rupee slide in July, the ratio would have worsened.

Short term debts and the External Commercial Borrowings that would need repayment during this FY 2013-14 is high and would cause large outflow of dollars and put pressure on the currency intermittently. For example during May 22 and June 19 there was a net debt outflow of $4.7 billion, one of the prime reasons why Rupee tanked.

These ECB’s and short term debt have grown to an enormous 56 percent of the total debt by March 2013 almost 2.5 times what they were when the UPA came to power nine years ago. As per RBI data short term debt payable during this Financial year is $ 96.7 billion while ECB’s with 6 month to 1 year maturity that need to be repaid are around $ 21 billion, and NRI deposits maturing during the year are $49 billion. The Rupee is catching a cold because the total foreign debt to be repaid this year works out to a massive $172 billion that is around two thirds the foreign exchange reserves. Even if interim measures to stop speculation is taking by the RBI it will not address the inherent weakness of the system. Rather it may enhance volatility as speculative traders if restricted will move offshore to short the Rupee.