The external debt to GDP ratio, at 19 per cent currently, is significantly lower than in FY91 (28 per cent) and below FY13 levels of 22 per cent, indicating that the overall debt burden relative to the size of the economy is manageable

The escalation of the West Asia conflict following the February 28, 2026 strikes on Iran and the subsequent disruption of the Strait of Hormuz has raised concerns about stress on our external account. With about 50 per cent of India’s crude oil imports and 80-90 per cent of our LPG imports passing through this route, the risks are real, as increased cost of imports and weakening rupee can rapidly deplete our foreign exchange reserves.

To assess the situation, businessline compared current external sector indicators with those seen during the FY91 balance of payments crisis and the FY13 taper tantrum. We find that while pressures are building, India’s fundamentals are stronger today.

Key indicators show a more stable external position. India’s external debt stood at $746 billion towards the end of September 2025, almost unchanged from the beginning of the fiscal year. While the debt is almost 82 per cent higher than the level of $409 billion towards the end of FY13, the increase is in line with the increase in size of the economy.

The external debt to GDP ratio, at 19 per cent currently, is significantly lower than in FY91 (28 per cent) and below FY13 levels of 22 per cent, indicating that the overall debt burden relative to the size of the economy is manageable.

Repayment obligations

The debt-service ratio, which measures how much of export earnings go toward repaying debt, remains in a comfortable range of only 6 per cent, suggesting that repayment obligations are not overwhelming. Although the debt-service ratio was 6 per cent only in FY13, the ratio of forex reserves to total debt was significantly lower (at 71 per cent) then, leaving little headroom for crisis financing. Presently forex reserves to total debt stands at 94 per cent, covering a substantial portion of total debt, providing a strong liquidity buffer.

Short-term debt, often a major risk during crises due to refinancing pressures, remains contained and within safe limits of about 20 per cent of forex reserves. During FY13, this metric was at 33 per cent, and a mind-boggling 146.5 per cent in FY91.

The measure for import cover shows how many months of imports can be financed using current forex reserves. Higher import cover means greater resilience during external shocks such as supply disruptions or oil price spikes. India’s current import cover remains comfortably at 10 months and has not shown signs of drastic fall yet. During the FY13 taper tantrum crisis, our import cover had suddenly fallen to seven months on the back of the rupee losing 15 per cent of its value against the US dollar, between May and August of that year.

As for the crisis of FY91, according to Dr YV Reddy, the import cover hardly ever crossed 3-4 months in the pre-liberalisation era. In a 2002 address he said: “In fact, it is often held that, between 1956 and 1992, India faced balance of payments constraints in all but six years.”

However, the Gulf war (1990-91) and the ensuing oil price spike drastically increased our import bill. By June 1991, India’s foreign exchange reserves had dwindled to $1.2 billion, enough to cover about 13-20 days of imports. Although we are nowhere near those levels, history has a tendency to repeat itself, fuelling fears.

Some early warning signs are emerging as well. Within just one week of the conflict, from February 27 to March 6, India’s forex reserves declined by $12 billion, falling from $728 billion to $716 billion.

According to Vinod Nair of Geojit Investments, “till date the underlying assumptions is that the conflict will remain short-lived and not extend beyond the next month. If this assumption proves incorrect, the economy outlook and balance of payment view could quickly shift toward weakness.”

Published on March 17, 2026