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External Sector 109

and capital requirements has been in place for banks’ exposures to firms with unhedged
foreign currency liability.

There has been a progressive rationalization and liberalization of the regulations governing the
end-use of ECBs with a view to improve ease of doing business, as documented in the Status
Report on India’s External Debt 2019-20. As per the extant policy effective January 16, 2019,
end-use restrictions relating to ECBs have been relaxed for specific eligible borrowers for
their working capital requirements, general corporate purposes and repayment of rupee loans.
Refinancing is permitted only if the outstanding maturity of the original borrowing (weighted
outstanding maturity in case of multiple borrowings) is not reduced and all-in-cost of fresh
ECB is lower than the all-in-cost (weighted average cost in case of multiple borrowings) of
existing ECB. Further, only highly rated corporates (AAA) and Maharatna/ Navratna public
sector undertakings are permitted to participate in refinancing of existing ECBs.
ICE Benchmark Administration (IBA), which compiles and oversees the LIBOR, intends that
one week and two-month US$ LIBOR settings will cease at end-2021, and that the remaining
US$ LIBOR panel will cease at end-June 2023 – 18 months later than was planned. Preliminary
estimates suggest that LIBOR-linked ECB/ FCCB exposure in the currencies (USD, GBP, JPY,
CHF and EUR) as at end-September 2020 in equivalent US dollar is estimated at US$ 81.8
billion of which, about US$ 57.5 billion of debt contracts in the form of ECB/ FCCB will
expire beyond end-December 2021. As is the case globally, financial contracts referencing
LIBOR – both loan and derivative contract – which will outlive the cessation will need to be
renegotiated to ensure insertion of appropriate fallback language.

Reference
Acharya V, Cecchetti, S., Gregorio, J., Kalemli - Ozcan , S., Lane , P., & Panizza, U. (2015).
Corporate Debt in emerging economies: A Threat to Financial Stability. Retrieved from
https://www.cigionline.org/sites/default/files/ciepr2015toweb.pdf
John Hawkins and Philip Turner. (2000). Managing foreign debt and liquidity risks in emerging
economies: an overview. BIS.

Ministry of Finance. (2020). India's External Debt - A Status Report: 2019-2020.
RBI. (2020). LIBOR: The Rise and the Fall. Bulletin, November.
Verma, R., & Prakash, A. (2011). Sensitivity of Capital Flows to Interest Rate Differentials: An
Empirical Assessment for India. RBI Working Paper Series No. 7. Retrieved 06 15, 2018, from
https://www.rbi.org.in/scripts/PublicationsView.aspx?id=13364

3.25 External debt as a ratio to GDP rose marginally to 21.6 per cent as at end-September 2020
from 20.6 per cent at end-March 2020 (Table 4). However, the ratio of foreign exchange reserves
to total and short-term debt (original and residual) improved because of the sizable accretion in
reserves. Share of short-term debt (original maturity) in the total stock of external debt, which is
2
an important metric to analyze potential debt vulnerability, has also improved. Reflecting lower
current receipts, debt service ratio (principal repayment plus interest payment), however, increased
to 9.7 per cent as at end-September 2020 as compared to 6.5 per cent at end-March 2020.

2 Short term debt by residual maturity includes short term debt by original maturity as well as long term debt repayment falling due within
next twelve months.