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Subject: “Foreign Exchange,Currency Devaluation”

  • India climbs to 4th spot as forex reserves post record weekly gain

    Why in the News

    India’s foreign exchange reserves have reached a record $785.71 billion, and the country has moved past Russia into fourth place globally. The stock rose by $44.9 billion in the week to 4 September, the largest weekly gain the Reserve Bank of India (RBI) has recorded. The gain came from a special forex drive the RBI opened in June. That drive offered banks a concessional currency swap on foreign currency deposits raised from non residents. It filled fast enough for the RBI to shut its main window a month ahead of the announced closing date. The rank and the record therefore rest on borrowed money, since a non resident deposit is a liability that falls due.

    What is the RBI’s concessional swap scheme?

    1. The deposit it targets: An FCNR(B) account, meaning Foreign Currency Non Resident (Bank), holds a non resident’s money in foreign currency and repays it in that same currency, so the depositor carries no rupee risk.
    2. What the swap does: The bank hands the foreign currency to the RBI in exchange for rupees. It receives a commitment to reverse that exchange at a fixed rate on maturity, so it does not carry the exchange risk on the principal.
    3. Why it is concessional: The swap was priced below the market cost of buying that cover, which is what made this route cheaper for banks than raising the same money abroad on their own credit.

    How big is the jump, and where does it place India?

    1. A record stock: Reserves stood at $785.71 billion on 4 September, up $44.9 billion from 28 August.
    2. A record weekly gain: The previous largest weekly rise was $16.7 billion, in the week ended 27 August 2021, so this gain is over two and a half times that mark.
    3. Fourth place came partly from a Russian decline: Russia’s international reserves fell $20.7 billion in the same week, from $774.2 billion to $753.5 billion, which put India ahead of it.
    4. The three still above India: China holds $3.85 trillion, Japan $1.21 trillion and Switzerland $1.09 trillion.

    What drove the gain?

    1. One instrument accounts for it: FCNR(B) deposits under the concessional swap brought in $127.23 billion up to 31 August, an inflow the RBI had not anticipated at that scale.
    2. The window shut early because of it: The scheme was set to close on 30 September. The pace of deposits led the RBI to close it a month sooner.
    3. A deposit drive registers directly as reserves: Foreign currency handed to the RBI under the swap enters the reserve stock in the week it lands, which is why a mobilisation shows up as a single large weekly jump rather than a gradual build.

    What did the full forex drive raise across its three windows?

    1. When it ran: The RBI announced the drive on 5 June and it became operational on 8 June.
    2. The Overseas Foreign Currency Borrowings window: The swap facility for Overseas Foreign Currency Borrowings (OFCBs), meaning foreign currency loans Indian banks raise abroad, drew $5.26 billion.
    3. The External Commercial Borrowings window: The facility for External Commercial Borrowings (ECBs), meaning foreign currency debt raised abroad by Indian companies, drew $3.89 billion.
    4. The combined total: All three windows together brought in $136.38 billion up to 31 August.
    5. Two windows are still running: The OFCB and ECB swap windows stay open until 31 December, so the drive has not finished.

    What does a larger reserve stock let the RBI do?

    1. A sustained run of increases: Reserves have now risen for ten weeks in a row.
    2. Ammunition for the rupee: A larger stock lets the RBI sell dollars to slow a fall in the rupee without drawing the cover down to an uncomfortable level.
    3. Import cover is the standard test: Reserve adequacy is judged by the number of months of imports the stock can pay for, and a higher stock lengthens that cover.
    4. It prices external borrowing: Lenders and rating agencies read reserve adequacy as a measure of a country’s capacity to meet external obligations, so the stock affects the terms on which Indian borrowers raise money abroad.

    Challenges to building reserves through a concessional swap window

    1. The addition is debt creating: A non resident deposit counts within India’s external debt, so the reserve stock and the liability against it rise together. Eg. Non resident deposits are among the largest single components reported in the Finance Ministry’s quarterly external debt statement.
      The Fix: Report the debt creating share of any reserve addition alongside the headline reserve number, so the two are read together.
    2. Maturities bunch at one point: A window filled inside three months falls due inside three months, which turns a one off inflow into a one off outflow at redemption. Eg. The concessional FCNR(B) swap of 2013 raised about $34 billion and came up for redemption together in late 2016.
      The Fix: Vary the swap rate by tenor, so deposits spread across maturities instead of bunching at the cheapest one.
    3. The subsidy sits on the central bank’s books: Pricing the swap below the market cost of cover means the RBI absorbs the difference on the exchange risk it has taken on. Eg. Cover on a three to five year rupee dollar exposure runs to roughly 3% a year, which is the order of the spread a concessional rate gives away.
      The Fix: Publish the cost of the swap subsidy as a stated line item, so the price of the reserve build is visible alongside the reserve total.
    4. A ranking is not a buffer: The reserve table compares stock sizes across economies with very different import bills and external liabilities, so a place in it says nothing about adequacy. Eg. Switzerland holds reserves above a trillion dollars on an economy a fraction of India’s size.
      The Fix: Judge the stock against import cover and short term external debt rather than against other countries’ totals.
    5. Reserve building substitutes for adjustment: Drawing in deposits to steady the currency postpones the correction a persistent current account gap eventually forces. Eg. The rupee continued to depreciate through the years after the 2013 deposit drive ended.
      The Fix: Tie each window to a stated reserve adequacy target, so it closes as a one time step rather than becoming a standing instrument.

    Conclusion

    India’s place in the reserve table now rests on money that has to be repaid rather than on export earnings or durable capital inflow. That distinction decides whether the buffer holds once the deposits mature. The two borrowing windows still open will show whether banks keep taking the concessional rate after the deposit window has closed. The number to watch is not the reserve total but the share of it carrying a matching external liability.

    Back2Basics: What foreign exchange reserves are made of

    1. Foreign currency assets: The largest component, held as deposits and securities denominated in currencies other than the rupee, and the part that moves most with valuation changes and market intervention.
    2. Gold: Bullion held by the RBI and valued at market prices, which is why the reserve total moves when the gold price moves.
    3. Special Drawing Rights: An international reserve asset created by the International Monetary Fund (IMF) and allocated to members in proportion to quota, exchangeable with other members for usable currency.
    4. Reserve tranche position: India’s own paid in quota holding at the IMF, which it can draw on without policy conditions attached.

    Matching Previous Year Question

    “[2013] Which one of the following groups of items is included in India’s foreign-exchange reserves? (a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries (b) Foreign-currency assets, gold holdings of the RBI and SDRs (c) Foreign-currency assets, loans from the World Bank and SDRs (d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank ANSWER: (b)”

  • Market turbulence is here to stay, may deepen

    Why in the News

    Indian equity markets closed lower with the Sensex down 1.08 per cent, and the weakness ran across small and midcap indices as well. The fall follows a run of external shocks rather than a domestic slowdown, since the economy is growing at a fairly healthy rate. The Sensex has lost roughly 12 per cent since the beginning of this year. Brent crude has touched $100 a barrel as the conflict in West Asia expands, and the rupee has slipped past the 95 mark against the dollar. The tension is that the drivers of the sell off sit outside the reach of domestic policy. The instruments available to answer them act on demand at home.

    What has actually moved in Indian markets?

    1. Index and breadth both weakened: The Sensex closed down 1.08 per cent and the fall extended to small and midcap indices rather than staying confined to large caps.
    2. Volatility rose sharply: The India VIX (an index of the volatility the options market expects in the Nifty over the next 30 days) rose almost 7 per cent.
    3. The decline is not a single session event: The Sensex has fallen by roughly 12 per cent since the beginning of this year.
    4. Information technology led the weakness: Concerns have mounted over the sector’s long term growth prospects, given the rapid deployment of artificial intelligence.
    5. Asian peers did not move together: The Nikkei was down 0.2 per cent. The Kospi was up 1.4 per cent.

    Why has investor sentiment weakened despite a healthy growth rate?

    1. The West Asian conflict has widened: Attacks by the Iran backed Houthis on energy facilities and infrastructure in Saudi Arabia mark an escalation and raise concerns over energy supplies.
    2. Crude has returned to triple digits: Brent crude oil has touched $100 a barrel, levels last seen in July.
    3. India’s own import cost has risen faster: The Indian crude oil basket surged to $108.91 per barrel as on 8 September, according to the Petroleum Planning and Analysis Cell.
    4. The currency has broken a psychological level: The Indian rupee has slipped past the 95 mark against the dollar.
    5. Foreign investors have turned sellers: Foreign investors have taken out $1.3 billion from the stock markets in September so far.
    6. The transmission runs through three channels: Higher prices act on the external balance, on the currency and on inflation together rather than one at a time.

    What does the global rate environment do to India’s policy room?

    1. The US central bank has signalled a harder stance: Remarks by the US Federal Reserve chairman at the recent Jackson Hole meeting were read as hawkish, raising expectations of an aggressive policy stance.
    2. A rate increase is now priced for the coming week: The odds of an interest rate hike at next week’s meeting have risen on those remarks.
    3. Sovereign yields elsewhere have repriced: The US 10 year bond yield is around 4.8 per cent and Japanese yields are hovering near 2.9 per cent, which narrows the return advantage of holding Indian assets.
    4. The domestic decision arrives into a softening economy: The Reserve Bank of India’s Monetary Policy Committee meets early next month with expectations of a move towards tightening. Growth momentum that surpassed expectations in the first quarter is expected to moderate in the second half of the year.

    Challenges to macroeconomic stability from sustained market turbulence

    1. Imported energy costs pass through to domestic prices: An expensive crude basket raises the import bill and feeds into freight and manufacturing costs within a quarter. Eg. India meets over 85 per cent of its crude oil requirement through imports.
      The Fix: Expand strategic petroleum reserve capacity and widen term supply contracts beyond West Asian sellers, so a regional escalation does not move the whole basket at once.
    2. A weaker currency raises the cost of external borrowing: Depreciation increases the rupee cost of servicing dollar denominated debt taken on by Indian firms. Eg. External commercial borrowings are raised largely in dollars and repaid out of rupee earnings.
      The Fix: Tighten hedging requirements on unhedged foreign currency exposure of corporate borrowers, so depreciation does not convert into balance sheet stress.
    3. Portfolio flows reverse faster than they arrive: Foreign portfolio investment tracks interest rate differentials rather than domestic earnings, so an outflow can begin before any local data changes. Eg. The taper tantrum of 2013 produced heavy outflows and a sharp rupee fall within weeks of a single central bank statement.
      The Fix: Deepen domestic institutional demand through retirement and insurance flows, so a foreign exit is absorbed rather than amplified.
    4. Defending the currency raises the cost of credit at home: A policy rate increase aimed at the exchange rate also raises borrowing costs for firms already facing weak demand. Eg. Micro, small and medium enterprises borrow largely at floating rates, so pass through reaches them first.
      The Fix: Pair any tightening with a targeted refinance line for small borrowers, so the rate defence does not fall hardest on the segment least able to absorb it.

    Conclusion

    Market weakness is no longer traceable to domestic growth. Its drivers are a war premium on oil, a harder rate path abroad and portfolio flows that respond to both. Domestic instruments act on demand at home and cannot offset an imported price shock. What remains unresolved is whether policy defends the currency or supports output, since a single rate decision cannot do both.

    Back2Basics

    1. What it is: The Indian basket of crude oil is a weighted average of the prices of the grades India actually imports, not a traded contract in its own right.
    2. What it averages: It combines sour grades of the Oman and Dubai type with the sweet Brent dated grade, weighted by the share of each in India’s import mix.
    3. Who compiles it: The Petroleum Planning and Analysis Cell, an attached office of the Ministry of Petroleum and Natural Gas, publishes it.
    4. Why it is used: It is the reference price for estimating the oil import bill and for tracking the cost of the crude that Indian refiners actually buy.

    Matching Previous Year Question

    “[2018, GS3, 15.0 marks] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?”

  • Beyond GDP, brace for turbulence ahead

    Why in the News

    Long term government bond yields in the advanced economies have risen sharply, raising the risk free return foreign capital can earn without entering India. Official growth estimates for April to June, together with car, two wheeler and tractor sales and Goods and Services Tax (GST) collections, show the economy absorbing the energy supply shock caused by the West Asia war. Strong output data does not settle the financing question, since capital compares India’s expected return against an assured dollar return. The dollars India did attract came through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, priced at rates Indian banks could offer only because the Reserve Bank of India (RBI) carried the hedging cost.

    How does the FCNR(B) deposit and swap arrangement work?

    1. The deposit: An FCNR(B) deposit is a term deposit placed with an Indian bank by a non-resident Indian, held and repayable in foreign currency.
    2. The bank’s exposure: The bank owes repayment in that foreign currency, so a fall in the rupee raises what the deposit costs it in rupee terms.
    3. The swap facility: The RBI bore the hedging cost against currency fluctuation through a special dollar rupee swap facility.
    4. Where the risk now sits: The banks transferred the risk of rupee depreciation to the central bank, which is what allowed them to pay a high rate in foreign currency.

    What do bond yields in Japan, the United States and the United Kingdom demonstrate about the cost of capital?

    1. Japan: The ten year government bond yield crossed 3 per cent for the first time since 1996, and the thirty year yield stands at 4.1 per cent.
    2. The United States: The ten year Treasury yield is at 4.8 per cent and the thirty year at 5.3 per cent.
    3. The United Kingdom: The ten year yield is at 5.2 per cent and the thirty year at 5.9 per cent.
    4. Why these set the benchmark: These instruments are virtually risk free, issued by governments that have never defaulted on their debts, so an assured 4.8 per cent dollar return is the floor any Indian asset has to beat.

    What did India have to pay to bring in dollars?

    1. The deposit rate: Indian banks offered 6 to 6.5 per cent interest on FCNR(B) deposits.
    2. The volume raised: The window mobilised $127.2 billion.
    3. The direction of travel: Foreign money no longer comes cheap, and the path of global bond yields points to it turning more expensive.

    Why does a strong growth number not settle the external financing question?

    1. The two measures test different things: Output and consumption data measure domestic demand. The financing question is whether a foreign investor’s expected return here beats a risk free alternative abroad.
    2. Equity returns are the transmission channel: Long term foreign capital enters on growth prospects that translate into equity market returns, and those prospects must be compelling against elevated yields.
    3. A window is not a policy: A special forex swap window is a one time reprieve for the external sector and cannot substitute for durable intervention.

    What would durable resilience require?

    1. Fiscal consolidation: In a rising interest rate environment a government cannot run high fiscal deficits, which crowd out private sector and other productive borrowing.
    2. Keeping the external account financeable: Those deficits must not spill into current account deficits, which are difficult to finance when global capital flows turn volatile.
    3. Export promotion: Exports are to be raised through increased access to global markets.
    4. Cheaper inputs for exporters: Duties on imported raw materials and components are to be eliminated.
    5. Predictability: Policy stability for foreign investors is the fourth durable intervention, alongside consolidation, exports and input duty removal.

    Challenges to relying on the FCNR(B) swap route

    1. The liability matures: A term deposit has to be repaid or rolled over on a fixed date, so an inflow raised in months becomes an outflow risk on a known one. Eg. The 2013 FCNR(B) swap window raised about $26 billion, and its redemption was concentrated in late 2016.
      The Fix: Stagger maturities across the deposit book and pre-announce the redemption profile, so repayment does not bunch into a single quarter.
    2. The central bank absorbs the currency loss: A hedging cost carried by the RBI becomes a loss on its own books if the rupee falls further than the swap rate assumed. Eg. The rupee’s record low against the dollar has been reset repeatedly since 2022.
      The Fix: Disclose the swap facility’s cost to the central bank’s balance sheet, so the public subsidy inside the scheme is visible.
    3. Debt creating inflows substitute for equity: A deposit is a repayable liability while direct investment is not, so the same headline inflow leaves a different obligation behind. Eg. Non-resident Indian deposits are counted within India’s external debt, and foreign direct investment is not.
      The Fix: Cap the share of external financing met through deposit schemes, so a reserve build is not increasingly borrowed.
    4. The inflow is rate sensitive and reversible: Money that arrives for an interest differential leaves when that differential narrows. Eg. Foreign investors withdrew from Indian debt in 2013 once United States yields rose after the taper announcement.
      The Fix: Build the buffer through current account improvement and equity inflows, so the stock of reserves does not depend on a rate spread.
    5. A headline reserves figure hides its composition: Reserves assembled through a swap window signal less resilience than the same figure built from a trade surplus. Eg. India’s reserves crossed $700 billion while the current account remained in deficit.
      The Fix: Report the hedged and unhedged components of reserves separately in the weekly statistical supplement.

    Conclusion

    India’s external position looks strongest at the moment it is most borrowed. A large stock of foreign currency has been assembled by paying for it, and part of that bill sits on the central bank’s own books rather than on the banking system’s. The tension left unresolved is one of timing: the measures that would make foreign capital cheap again work over years, and the rate environment that made it expensive changed in months. What to watch is whether a second window is opened when the first one matures.

    “[2013] Which one of the following groups of items is included in India’s foreign-exchange reserves?

    (a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries

    (b) Foreign-currency assets, gold holdings of the RBI and SDRs

    (c) Foreign-currency assets, loans from the World Bank and SDRs

    (d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

  • Forex swap rakes in over $136 bn

    Forex swap rakes in over $136 bn

    Why in the News

    Foreign exchange inflows under the Reserve Bank of India’s (RBI) special swap facility have crossed $136 billion, surpassing all projections. The facility was introduced on 8 June this year to deal with forex outflows caused by high oil prices and by the exit of Foreign Portfolio Investors from the stock market. The task has now shifted from raising dollars to managing what they release. Every dollar brought in creates rupee liquidity in the banking system, and the RBI has already begun absorbing it to stop call rates falling below the policy rate.

    What is the RBI’s special USD-INR swap facility?

    1. What it does: The facility lets a bank exchange dollars raised abroad for rupees with the RBI at a concessional rate, with a commitment to reverse the exchange at a future date.
    2. What it covers: It applies to three instruments, Foreign Currency Non-Resident (Bank) or FCNR(B) deposits, Overseas Foreign Currency Borrowings (OFCBs), and External Commercial Borrowings (ECBs).
    3. Why it was opened: It was designed to attract fresh foreign currency at a time when the rupee and India’s reserves were under pressure from oil prices and portfolio outflows.

    Where did the $136 billion come from?

    1. The total mobilised: A total of $1,36,377 million has been mobilised, according to data released by the RBI.
    2. FCNR(B) deposits dominate: Deposits by overseas Indians accounted for $1,27,226 million, the overwhelming share of the mobilisation.
    3. Corporate borrowing contributed little: OFCBs brought in $5,260 million and ECBs a further $3,891 million.

    Why does the RBI’s short forward dollar position matter now?

    1. What a short forward position is: Short forward dollars are currency derivative contracts in which the RBI commits to sell dollars at a future date at a predetermined rate.
    2. Why the RBI built one: The instrument defends the rupee without drawing down spot reserves immediately, so the headline reserve figure holds while the commitment sits in the forward book.
    3. The size of the book: The RBI carries an outstanding short forward position of $137 billion, close to the entire mobilisation under the swap facility.
    4. How the two connect: If the RBI decides not to roll over those positions, it may use the excess reserves generated from the FCNR(B) scheme to deliver the dollars it has contracted to sell.

    What does the inflow do to domestic liquidity?

    1. Rupees enter as dollars arrive: Delivering on the forward book absorbs rupee liquidity from the banking system, which is why the RBI has begun draining it before call rates slip under the policy rate.
    2. The surplus is large: Banking system liquidity stood at Rs 6.5 lakh crore, and the RBI may absorb part of it so short term money supply does not feed into inflation and borrowing costs stay aligned with the policy rate.
    3. Banks gain a cheap funding base: In the immediate term banks are inclined to use the inflow to strengthen their asset side books and cut their dependence on wholesale deposits.
    4. The longer use is credit: Over a longer horizon the same liquidity can be deployed to fund credit growth.

    Conclusion

    The facility has done more than it was designed to do, and the constraint has moved from the external account to the domestic money market. The decision that now matters is whether the central bank rolls its forward commitments over or lets them run off against the deposits it has raised. Rolling over keeps the liquidity in the system; delivering drains it. That choice, and the pace at which it is made, is what will determine short term rates over the coming quarter.

    Back2Basics: External Commercial Borrowings

    1. What they are: ECBs are loans raised by eligible Indian entities from recognised non resident lenders, denominated in foreign currency or in rupees.
    2. Forms they take: They cover bank loans, buyers’ and suppliers’ credit, and instruments such as foreign currency convertible bonds.
    3. How they are regulated: The RBI governs them under the Foreign Exchange Management Act, 1999, through the automatic route up to prescribed limits and the approval route beyond them.
    4. What the framework controls: The rules set the minimum average maturity, the all in cost ceiling and the end uses for which the borrowed money may be applied.

    [2022] With reference to the Indian economy, consider the following statements :

    1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.

    2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.

    3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.

    Which of the above statements are correct ?

    (a) 1 and 2 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

  • FCNR(B) deposits push forex reserves to all-time high of $729 bn in August

    Why in the News

    The Reserve Bank of India’s concessional swap window for Foreign Currency Non-Resident (Bank), or FCNR(B), deposits has propelled India’s foreign exchange reserves to a record $729.33 billion as of 21 August, surpassing the previous all-time high of $728.49 billion recorded on 27 February, just a day before the United States and Israel struck Iran and touched off the West Asia conflict that drove global energy prices sharply higher. Reserves rose by $12.42 billion in the week ended 21 August alone, with FCNR(B) inflows of $65.4 billion accounting for most of the $72.85 billion that has entered India since three concessional swap windows opened on 8 June.

    What is driving reserves to a record, and what does the FCNR(B) window actually do?

    1. Scale of inflows: FCNR(B) deposits outstanding rose from $34.04 billion at the end of May to $65.4 billion by 21 August, since the window opened on 8 June, and reserves themselves jumped $12.42 billion in the week ended 21 August.
    2. Mechanism: Under the FCNR(B) scheme the central bank bears the full exchange rate risk on these non-resident deposits, since the money is held in foreign currency rather than converted into rupees, which let banks offer interest rates as high as 7.4 percent.
    3. Leveraged NRI participation: Non-resident Indians have also borrowed at lower interest rates abroad to deposit the proceeds into FCNR(B) accounts, earning returns of as much as 15 percent on the resulting spread.

    Why did reserves need rebuilding in the first place?

    1. The rupee was already under stress before the record: The rupee came under intense pressure from large foreign portfolio outflows, with $19 billion leaving Indian markets in 2025 and a further $24 billion in the first five months of 2026, pushing the currency to near 97 per dollar in mid-May.
    2. The West Asia conflict added an oil import shock: Since roughly 85 percent of India’s crude oil needs are met through imports, the conflict’s closure-driven spike in global energy prices raised the country’s import bill and added further pressure on the rupee just as reserves were near their earlier February high.
    3. The rupee remains down year-on-year despite the record reserves: The rupee closed at 95.39 per dollar on Friday, little changed from its 95.79 level on 4 June and still 8.1 percent weaker than a year earlier, showing the reserve build has stabilised rather than reversed the currency’s decline.

    What other measures accompanied the FCNR(B) window?

    1. Two additional swap windows: Announced alongside FCNR(B) on 5 June, swap facilities for Overseas Foreign Currency Borrowings and External Commercial Borrowings have together brought in $4.86 billion and $2.59 billion respectively since 8 June.
    2. Tax relief for foreign portfolio investors: The government removed capital gains and withholding taxes on foreign portfolio investment in government securities as part of the same package meant to pull in capital and support the rupee.
    3. An accelerated closure timeline: Because inflows arrived faster than expected, the RBI moved the FCNR(B) window’s closing date to 31 August, a month earlier than the originally announced 30 September deadline.

    Challenges to relying on FCNR(B)-driven reserve accumulation

    1. Weak currency response relative to precedent: The rupee has barely moved during this swap window, compared with the 2013 episode when the rupee rose 10.3 percent, from 67.6 to 61.3 per dollar, in the first 40 days after the RBI’s then-Governor introduced a similar FCNR(B) swap facility. Eg. The rupee moved from 95.79 to 95.39 per dollar between 4 June and 29 August this year, a fraction of the 2013 currency response to a comparable scheme. Fix. Pair reserve accumulation with structural measures that improve the current account, such as diversifying energy import sources, rather than treating swap-driven capital inflows alone as sufficient to support the currency.
    2. Reversal risk from leveraged hot money: A meaningful share of FCNR(B) inflows has been driven by non-resident Indians borrowing cheaply abroad to arbitrage into high-yield deposits, a flow that can reverse quickly once interest rate differentials narrow or the window closes. Eg. The window’s early closure on 31 August, a month ahead of schedule, was itself driven by inflows arriving faster than expected, which cuts both ways once the scheme ends and deposits mature. Fix. Stagger FCNR(B) maturities and monitor the redemption schedule closely to avoid a sudden reserve drawdown when large deposit tranches come due.

    Conclusion

    The FCNR(B) swap window has pushed India’s foreign exchange reserves past their previous February high to a record $729.33 billion, giving the Reserve Bank of India greater capacity to defend the rupee after a period of heavy foreign portfolio outflows and an oil price shock from the West Asia conflict. The rupee’s limited appreciation despite the record inflow, unlike the sharper rupee gains seen after the comparable 2013 swap window, signals the current build is cushioning rather than reversing currency pressure.

    Back2Basics: What are FCNR(B) deposits?

    1. FCNR(B) deposits are foreign currency accounts that non-resident Indians can hold with Indian banks, where the deposit and its returns stay denominated in the foreign currency rather than in rupees.
    2. The scheme shifts exchange rate risk onto the Reserve Bank of India rather than the depositor or the bank, which lets banks offer higher interest rates to attract inflows during periods of currency pressure.
    3. India last used a similar concessional FCNR(B) swap window in 2013, under then RBI Governor Raghuram Rajan, to stabilise the rupee following a sharp depreciation.

    Matching Previous Year Question

    No direct PYQ traced in the provided files (Pass 1: FCNR(B), forex reserves record — no match; Pass 2: balance of payments, current account — matches found were conceptually unrelated to a record reserves event).

  • Export payments in rupees get trade policy benefits

    Why in the News

    Two paragraphs of the Foreign Trade Policy 2023 were amended on 20 August 2026 so that exporters invoicing overseas sales in Indian rupees receive the same trade policy benefits as those realising payment in foreign currency. Rupee invoicing has been permitted for years without carrying equal benefit, and removing that mismatch shifts the constraint from India's own rulebook to whether foreign buyers will hold and pay in rupees.

    What is the Foreign Trade Policy 2023?

    1. About: The Foreign Trade Policy is the framework issued by the Directorate General of Foreign Trade setting out the rules, entitlements and obligations governing India's exports and imports.
    2. What its benefits are: Policy benefits include duty remission and duty exemption entitlements that lower the cost of inputs used in exported goods, claimed against realised export proceeds.
    3. Export obligation: Several of these entitlements are conditional on the exporter fulfilling a stated export obligation, measured against the value of realised proceeds.
    4. The 2023 version: The current policy has no end date and is amended continuously by notification rather than being replaced every five years.

    What is the Asian Clearing Union?

    1. About: The Asian Clearing Union is a regional payment arrangement established in 1974 to facilitate trade settlements and reduce repeated transfers of foreign exchange by periodically settling the net obligations of its members.
    2. Membership: It has nine members, Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka, represented by their central banks or monetary authorities.

    What is a Special Rupee Vostro Account?

    1. About: A Special Rupee Vostro Account is a rupee account opened in an Indian bank by a correspondent bank of a partner country, through which international trade is invoiced, paid for and settled in rupees.
    2. Its purpose: The framework was implemented in view of the evolving dynamics of India's international trade, and it lets a foreign buyer pay in rupees without either side converting through a third currency.

    What exactly has changed in the Foreign Trade Policy?

    1. The stated purpose of the amendment: Two paragraphs of the Foreign Trade Policy 2023 were amended to align the provisions on denomination of export contracts and eligibility for policy benefits in respect of export realisation in Indian rupees with the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023.
    2. Denomination freed outside the Asian Clearing Union: For countries outside the Asian Clearing Union, export contracts and invoices may now be denominated in any foreign currency or in Indian rupees.
    3. Coverage: The amendments cover exports to all countries, with the applicable rules varying by destination.
    4. Two countries excepted: Eligible rupee payments for exports to any country other than Nepal and Bhutan will now qualify for trade policy benefits and count towards fulfilment of export obligations.
    5. Parity with foreign currency realisation: Rupee earnings received through approved banking channels are to be treated on par with export payments received in foreign currency.
    6. Lines of credit included: Exports financed through the Export-Import Bank of India or through Government of India lines of credit may also be invoiced in Indian rupees.

    Why were rupee realisations treated differently until now?

    1. Two rulebooks had drifted apart: The exchange control regulations permitted receipt in rupees while the trade policy did not extend the same benefit eligibility to those receipts, so the exporter chose the currency and lost the entitlement.
    2. The export obligation problem: An exporter claiming a duty exemption against an export obligation needed the realisation to count, and a rupee realisation that did not count left the obligation unfulfilled on paper.
    3. The Asian Clearing Union carve-out: Settlement among the nine members runs through the Union's own netting mechanism, which is why denomination rules for those destinations differ from the rest.
    4. The effect on behaviour: Faced with the risk of losing entitlements, exporters defaulted to dollar invoicing even where the counterparty was willing to pay in rupees.

    What does rupee invoicing do for India's external position?

    1. Reduces demand for foreign exchange in settlement: Every transaction invoiced in rupees is one that does not require the exporter or the buyer to source dollars, easing pressure on reserves.
    2. Removes a layer of conversion cost: Trade settled directly between two currencies avoids the spread paid twice when a third currency intermediates.
    3. Insulates counterparties under sanctions pressure: Rupee settlement lets trade continue with partners whose access to dollar clearing is restricted, which is why several Asian Clearing Union members matter here.
    4. Supports lines of credit as an export instrument: Invoicing Export-Import Bank of India and Government of India credit lines in rupees keeps both the financing and the payment inside one currency.
    5. Builds a rupee balance abroad: Settlement in rupees creates rupee holdings with foreign banks, which is the first condition for the currency being used beyond bilateral trade.

    Why does a rulebook change not by itself internationalise the rupee?

    1. Willingness sits with the counterparty: India can permit rupee invoicing and cannot make a foreign buyer accept payment in a currency it has no independent use for.
    2. A trade deficit limits the mechanism: Rupee settlement works most easily where flows are balanced, and India's persistent goods trade deficit means partners accumulate rupees faster than they can spend them.
    3. Idle balances need an investment outlet: A rupee balance held abroad is only attractive if it can be deployed in Indian government securities or corporate paper at a return the holder accepts.
    4. Currency weakness discourages holding: A depreciating currency is a poor store of value between invoice and use. Eg. The rupee was quoted at 95.71 to the dollar on the day the notification was issued.
    5. Convertibility remains partial: The rupee is convertible on the current account and only partially on the capital account, which limits what a foreign holder can do with a rupee balance.

    What challenges does rupee-denominated trade settlement face?

    1. Accumulated balances with no deployment route: Partners that sell more to India than they buy build rupee balances they cannot spend. Eg. Rupee balances held under vostro arrangements with Russia accumulated well beyond what Russian buyers could absorb in Indian goods.
    2. Exchange rate risk shifts to the foreign counterparty: A buyer paying in rupees carries the depreciation risk that the exporter previously bore. Eg. The rupee has weakened steadily against the dollar, having breached the 91 mark during 2025-26 and traded near 95.7 in August 2026.
    3. Thin rupee hedging markets offshore: A foreign counterparty cannot cheaply hedge a rupee exposure in the way it hedges a dollar one. Eg. Offshore non-deliverable forward markets in the rupee developed precisely because onshore hedging access is restricted for non-residents.
    4. Correspondent banking and compliance frictions: Opening and operating vostro accounts requires approvals and sanctions screening that smaller banks avoid. Eg. Trade with Asian Clearing Union member Iran has repeatedly stalled on the willingness of banks to handle the settlement leg.
    5. Interest rate and return disadvantage: Rupee balances earn less than the holder can obtain in reserve currency instruments unless a specific investment window is opened. Eg. Permission to invest surplus vostro balances in Indian government securities was extended precisely to address this gap.
    6. Documentation mismatch across regulations: Exporters must satisfy both exchange control and trade policy requirements, and any divergence between them creates a compliance risk. Eg. The present amendment exists only because eligibility rules under the Foreign Trade Policy had drifted from the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023.
    7. Uneven customer experience at the bank counter: Documentation demands and delays at authorised dealer banks slow cross-border remittances regardless of the currency chosen. Eg. A supervisory review found multiple documentation requirements and cases of delay in executing cross-border remittances, and banks were advised to publish a clear policy on documentation, charges, timelines and grievance redress.

    Conclusion

    The amendment removes an internal inconsistency rather than creating a new entitlement, since it makes a rupee realisation earn the same trade policy benefit and count towards the same export obligation as a dollar realisation. That closes the reason exporters had for avoiding rupee invoicing even where the buyer was willing. The notification has been issued by the Directorate General of Foreign Trade and is in effect, and the measure that follows is whether the Special Rupee Vostro Account framework generates enough deployable rupee balances abroad for foreign buyers to choose rupee settlement on their own account.

    India's External Sector

    1. What it covers: The external sector comprises merchandise and services trade, investment flows in both directions, external borrowing, remittances, foreign exchange reserves and the exchange rate that links them.
    2. Two accounts: The current account records trade in goods and services, primary income and transfers. The capital and financial account records investment and borrowing flows.
    3. Direct investment position: India held fifth position globally in foreign direct investment inflows with $28 billion in 2024, fourth position in announced greenfield projects, and fifth position in international project finance deals.
    4. Recent direction of flows: Net foreign direct investment turned negative for three consecutive months during 2025, with gross inflows staying strong while outward investment and repatriation rose.
    5. Currency pressure: The rupee breached the 91 mark against the dollar during 2025-26 and emerged as Asia's worst performing currency amid trade uncertainty.
    6. Energy in the import bill: India depends on imports for over 88% of its crude oil requirement and about half of its natural gas consumption, so the trade balance moves with global energy prices.
    7. Global backdrop: Global foreign direct investment fell 11% in 2024, and the share of foreign direct investment in global Gross Domestic Product fell from 5% in 2007 to under 1% in 2023-24.

    Laws and Rules Governing Foreign Trade and Payments in India

    1. Foreign Trade (Development and Regulation) Act, 1992: Provides for the development and regulation of foreign trade and is the statute under which the Foreign Trade Policy and the office of the Director General of Foreign Trade exist.
    2. Empowers the Central government to formulate and announce the export and import policy and to amend it by notification.
    3. Foreign Exchange Management Act, 1999: Governs all foreign exchange transactions, replacing a control-based regime with a management-based one and treating contraventions as civil rather than criminal.
    4. Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 prescribe the currencies and channels through which export proceeds may be received, the regulations the present amendment aligns the trade policy to.
    5. Customs Act, 1962: Governs the levy of customs duty, valuation, clearance of goods and the operation of duty exemption and remission schemes at the border.
    6. Customs Tariff Act, 1975: Prescribes the rates of import and export duty and provides for anti-dumping and countervailing measures.
    7. Special Economic Zones Act, 2005: Governs the establishment and operation of zones treated as outside the customs territory for duty purposes.
    8. Reserve Bank of India Master Directions on Export of Goods and Services: Prescribe realisation and repatriation periods, documentation and the role of authorised dealer banks in export transactions.

    Government Initiatives for Export Promotion

    1. Remission of Duties and Taxes on Exported Products: Refunds embedded central, state and local duties and taxes that are not otherwise rebated, at notified rates by tariff line.
    2. Rebate of State and Central Taxes and Levies: Provides rebate of embedded taxes specifically for exports of garments and made-ups.
    3. Advance Authorisation and Duty Free Import Authorisation: Allow duty free import of inputs physically incorporated in an export product, against a stated export obligation.
    4. Export Promotion Capital Goods scheme: Permits import of capital goods at zero duty against an export obligation linked to the duty saved.
    5. Interest Equalisation Scheme: Provided interest subvention on pre-shipment and post-shipment rupee export credit, particularly for micro, small and medium enterprises and for identified sectors.
    6. Districts as Export Hubs: Identifies products with export potential in each district and builds district-level export action plans and institutional support.
    7. Market Access Initiative: Funds participation in international trade fairs, buyer-seller meets and market studies to open new destinations.
    8. Trade Connect e-Platform: Brings exporters, Indian missions abroad, export promotion councils and banks onto a single digital interface for market and regulatory information.

    Back2Basics: Directorate General of Foreign Trade (DGFT)

    1. What it is: The agency responsible for formulating, implementing and amending India's Foreign Trade Policy.
    2. Parent ministry: It functions under the Department of Commerce in the Ministry of Commerce and Industry.
    3. Statutory basis: It operates under the Foreign Trade (Development and Regulation) Act, 1992.
    4. Core function: It issues the Importer Exporter Code, without which no person may import or export except as exempted.
    5. Entitlement administration: It grants authorisations and scrips under the duty exemption and duty remission schemes and monitors fulfilment of export obligations.
    6. Instrument of change: It amends the Foreign Trade Policy and the Handbook of Procedures through notifications, public notices and circulars.
    7. Trade facilitation role: It runs the online platform through which authorisations are applied for and issued, and it handles quality complaints and trade disputes involving Indian exporters and importers.

    Challenges in India's External Sector

    1. Structural merchandise trade deficit: Import demand for energy, electronics and gold consistently exceeds export earnings, which keeps the current account in deficit. Eg. Net oil and gas imports rose 43.4% in value to $57.8 billion in April to July of 2026-27 from $40.3 billion a year earlier.
    2. Concentration of imports in a few commodities: A price shock in one commodity transmits directly to the trade balance. Eg. Every one dollar per barrel increase in oil prices raises India's annual oil import bill by up to $2 billion, on annual imports of 1.8 to 2 billion barrels.
    3. Protectionism and tariff shocks in destination markets: Export access can be withdrawn by unilateral action outside any trade agreement. Eg. Tariffs on key goods surged to 50% in August 2025, disrupting exporter planning.
    4. Competition from alternative manufacturing destinations: Rivals offer faster approvals and wider free trade agreement networks to firms relocating supply chains. Eg. Vietnam, Indonesia and Mexico compete directly for near-shoring investment that India seeks.
    5. Volatility of portfolio capital: Portfolio flows reverse quickly and transmit directly to the exchange rate. Eg. Foreign portfolio investors recorded an outflow of Rs 1.66 lakh crore, equivalent to $18.9 billion, in 2025, the largest since such investment began.
    6. Rising outward investment and repatriation: Indian firms investing abroad and foreign firms repatriating profits both reduce net inflows even when gross inflows hold up. Eg. Foreign companies operating in India repatriated about $5 billion in October 2025, of which $3.3 billion followed a single initial public offering.
    7. Round-tripping and financialisation of investment flows: A large share of inflows originates from a few jurisdictions and increasingly arrives through funds rather than as direct industrial equity. Eg. Inflows routed through Mauritius and Singapore reflect tax arbitrage rather than fresh industrial capital.
    8. Exchange rate depreciation raising the external debt burden: A weaker rupee raises the rupee cost of servicing external liabilities without any new borrowing. Eg. The rupee emerged as Asia's worst performing currency during 2025-26 amid trade uncertainty.

    Way Forward

    1. Open deployment routes for accumulated rupee balances: Allowing surplus vostro balances into Indian government securities, corporate bonds and project financing gives foreign holders a reason to accept rupees.
    2. Expand bilateral local currency settlement arrangements: Agreements with major trading partners, negotiated alongside the vostro framework, are what convert a permission into actual volumes.
    3. Deepen onshore rupee hedging access for non-residents: A foreign buyer that can hedge a rupee payable onshore no longer needs a dollar invoice to manage currency risk.
    4. Keep the trade policy and exchange control rulebooks synchronised: A standing reconciliation between the Foreign Trade Policy and the exchange management regulations would prevent the mismatch this amendment had to correct.
    5. Fix the customer experience at authorised dealer banks: Publishing documentation requirements, charges, timelines and escalation routes on bank websites and at branches removes a practical barrier that no notification reaches.
    6. Diversify the export basket and destinations: Reducing dependence on a small number of markets and product lines is the durable answer to unilateral tariff action.
    7. Reduce the energy component of the import bill: Faster domestic oil and gas output, refining efficiency and electrification of transport address the largest single driver of the trade deficit.

    Matching Previous Year Question

    “No direct PYQ traced in the provided files (closest microtheme: Foreign Exchange,Currency Devaluation)”

  • How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

    The rising protectionism and currency manipulations have disrupted global trade flows and have direct implications for India’s growth, inflation, fiscal balance, and external vulnerability.

    Tools of Protectionism

    Tariffs

    Quotas

    Import Licensing

    Sanctions

    Exchange Controls

    Industrial Subsidies

    Impact of Protectionism on Macroeconomic Stability of India

    Export Slowdown due to high tariffs. Eg: US protectionism under Section 232 hurt India’s steel exports.

    Supply Chain Disruptions lead to higher Production Costs. Eg- higher oil prices after Israel-Palestine conflict

    Imported Inflation due to barriers on food, energy and intermediate goods. Eg: Indonesia palm oil ban.

    Weak Employment in Export-oriented Sectors – Eg: Fall in European demand hit India’s textile and leather clusters.

    Lower FDI Inflows – Uncertain trade regimes discourage long-term investments. Eg- Apple cancelling plant in India after Trump threat.

    Impact of Currency Manipulations on Macroeconomic Stability

    Widening Trade Deficit – Undervalued currencies make their exports cheaper. Eg- China’s managed yuan

    Rupee Volatility creates monetary Policy Challenges. Eg: Yen depreciation in 2023-24 triggered pressure on Asian currencies including INR.

    Higher Inflation and BoP Pressure – Eg: INR touching 83-84 per USD raised petroleum import bills.

    Capital Outflows due to dollar strengthening. Eg: 2022-24 saw FPI outflows during phases of aggressive US Fed tightening.

    Pressure on Forex Reserves – Eg: RBI sold USD in 2022-23 to stabilise INR, reducing reserves temporarily.

    Opportunities for India Amid Protectionism & Currency Politics

    China+1 Advantage in electronics, chemicals, renewables. Eg- Mobile exports crossed USD 11 bn in 2023-24.

    Boost Make in India to build self-reliant supply chains. Eg: PLI schemes in semiconductors, textiles, solar modules.

    Diversification of Trade Partners – Eg- Recent FTA with UK

    Strategic Attractiveness as a Stable Market – Amid volatile currencies and geo-economic blocs, India is seen as a stable investment destination.

    Promoting Rupee Trade Mechanisms – Eg- INR invoicing and Vostro accounts.

    Opportunity to Lead on Fair Trade Norms in WTO, G20 on currency transparency and non-tariff barriers.

    Way Forward

    Enhance R&D (2.5% of GDP), reduce logistics costs (PM Gati Shakti), and expand PLI schemes to boost manufacturing resilience.

    Accelerate FTAs with EU, GCC to reduce over-dependence on a few partners.

    Strengthen FOREX buffers and expand rupee trade settlement

    Encourage domestic production of critical inputs (electronics, APIs, green tech) to reduce vulnerability to global shocks.

    Scale IT, fintech, health tourism, education services to offset goods-trade shocks from rising protectionism.

    By strengthening domestic competitiveness, India can position itself as a reliable, rules-based and resilient player in the evolving global economic order.

  • Consider the following statements

    Consider the following statements:

    The effect of devaluation of a currency is that it necessarily:

    1.Improves the competitiveness of the domestic exports in the foreign markets.
    2.Increases the foreign value of domestic currency.
    3.Improves the trade balance.
    Which of the above statements is/are correct?

  • With reference to the Indian economy, consider the following statements

    With reference to the Indian economy, consider the following statements :
    1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
    2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
    3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
    Which of the above statements are correct ?

  • Consider the following statements: The price of any currency in international market is decided by the

    Consider the following statements: The price of any currency in international market is decided by the
    1. World Bank
    2. Demand for goods/services provided by the country concerned
    3. Stability of the government of the concerned country
    4. Economic potential of the country in question
    Which of the statements given above are correct?