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External Sector 109

end-March 2021, reflecting lower repayments and higher current receipts. The share of short-
term debt in total external debt fell marginally to 17.0 per cent at end-September 2021 from
17.7 per cent at end-March 2021. Further, a sizeable accretion in reserves, however, led to an
improvement in other external vulnerability indicators such as forex reserves to total external
debt, short term debt to foreign exchange reserves, etc. The foreign exchange reserves as a ratio
to external debt crossed 100 percent after 11 years since 2010, and stood at 107.1 per cent as
at end-September 2021. The ratio of short-term debt (original maturity) to foreign exchange
reserves declined to 15.8 per cent at end-September 2021 from 17.5 per cent at end-March 2021.

3.57 As documented in the previous edition of the Economic Survey, from a medium-term
perspective, India’s external debt continues to be below what is estimated to be optimal for an
emerging market economy, while various external sector vulnerability indicators improved over
the recent years, pointing towards the resilience of India’s external sector.

3.58 In recent months, scaling back of pandemic-related stimulus programme amidst persistent
inflationary pressures in advanced economies, particularly the US, have reignited some fears
of taper tantrum. However, India’s external sector – well supported by strong exports, capital
inflows, low CAD and external financing requirements and high foreign exchange reserves, with
various external vulnerability indicators well within manageable limits – is far better prepared
this time to face any external shocks arising out of tightening of the monetary policy stance by
the advanced economies in coming months (Box 2).

Box 2: Taper without Tantrums: India’s external sector resilience

The Federal Reserve embarked on a programme of asset purchases under the Quantitative Easing
(QE), as part of a broader policy response to the Global Financial Crisis in 2007-08. As the US
economy gained traction, in an attempt to unwind the QE, on May 22, 2013, the Fed announced
the intent to start tapering asset purchases at a future date, which triggered a tantrum in the form of
spike in bond yields and resulted in disruptions on the external front for India as well.

In response to the pandemic, since June 2020, the Fed had been buying US$ 80 billion of Treasury
securities and US$ 40 billion of agency mortgage-backed securities (MBS) each month. In late July
2021, the Fed signalled that it would start reducing the volume of its bond purchases later in the year.
On November 3, 2021, the Federal Open Market Committee unanimously voted to scale back its asset
purchases. In line with this, the Reserve Bank of Australia (RBA) has also abandoned its yield curve
target. As yields on government debt climbed, the RBA chose not to intervene to defend its target of 10
basis points for debt maturing in April 2024. Bank of Canada has gradually tapered its asset purchases
in recent months. Thus, the long-awaited taper process has commenced by the systemically important
central banks, renewing thereby an element of interest - within the academia and policy circles - in the
potentially destabilising spill-over impact on the emerging market and developing economies as also
for India. There is evidence that, inter alia, these emerging markets, including India, have succeeded
in strengthening their external economic and financial position since 2013 and the ramifications of the
taper on the Indian external sector would be limited (Barry Eichengreen et al (2021)).