"Foreign Capital Returns to India Amid Mounting Macroeconomic Headwinds"
FCNR(B) Deposits
Foreign Currency Non-Resident (Bank) deposits: foreign-currency term deposits by the Indian diaspora, insulating depositors from rupee risk and providing the RBI stable forex inflows.
Current Account Deficit (CAD)
Excess of a country's imports of goods, services, and transfers over its exports; a key indicator of external sector stress.
India's external sector has long been shaped by the interplay between two distinct capital flow channels: Foreign Portfolio Investment (FPI), which is short-term and highly sensitive to global risk sentiment, and Foreign Direct Investment (FDI), which represents longer-term productive capital committed to physical and institutional capacity. Both channels are regulated under the Foreign Exchange Management Act (FEMA), 1999, with the Reserve Bank of India (RBI) as the primary monitoring authority and the Department for Promotion of Industry and Internal Trade (DPIIT) serving as the nodal agency for FDI policy. Historically, India has been vulnerable to sudden stops and reversals in FPI flows — episodes triggered by external shocks such as the 2013 'taper tantrum', the COVID-19 pandemic, and the US Federal Reserve's aggressive rate-hiking cycle from 2022 onwards.
The FCNR(B) (Foreign Currency Non-Resident Bank) deposit scheme is a specific instrument the RBI has periodically deployed to attract stable, non-debt-creating foreign exchange inflows from the Indian diaspora. Unlike FPI flows, FCNR(B) deposits are term deposits held in foreign currency, insulating depositors from rupee depreciation risk and providing the RBI with a relatively stable source of foreign exchange. The scheme was notably used in 2013 to stabilise the rupee during the taper tantrum episode, when it mobilised approximately $34 billion. Its reactivation in the current cycle signals that the RBI is once again leaning on diaspora capital as a buffer against external volatility.
The transmission mechanism linking global shocks to India's macroeconomy operates through several interconnected channels. When global risk aversion rises — triggered by geopolitical conflict, commodity price spikes, or monetary tightening in advanced economies — FPIs typically exit emerging market equities and bonds, putting downward pressure on the host country's currency. A depreciating rupee simultaneously raises the cost of India's import bill (particularly crude oil, which India imports to meet roughly 85% of its requirements), widens the current account deficit (CAD), and imports inflation through higher input costs across manufacturing and logistics.
Crude oil occupies a uniquely central position in India's macroeconomic calculus. Every $10 per barrel increase in crude prices is estimated to widen India's CAD by approximately 0.4–0.5% of GDP and add roughly 30–40 basis points to headline inflation. The Indian crude oil basket — a weighted average of Oman, Dubai, and Brent crude — serves as the benchmark for domestic pricing decisions. …
With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
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?
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 FCNR(B) deposits, consider the following statements:
1.They are denominated in foreign currency, insulating depositors from rupee depreciation risk.
2.They are classified as debt-creating capital flows in India's balance of payments.
3.The RBI has used this instrument to stabilise the rupee during episodes of capital outflow pressure.
Which of the above statements is/are correct?
Which of the following correctly describes the 'Indian crude oil basket'?
With reference to Section 301 of the US Trade Act, which of the following statements is/are correct?
1.It empowers the US Trade Representative (USTR) to investigate unfair trade practices by foreign countries.
2.It can be used to impose tariffs on countries found to burden or restrict US commerce.
3.It has been used exclusively against developing countries and cannot be applied to OECD members.
Assertion (A): A sharp rise in global crude oil prices tends to widen India's current account deficit.
Reason (R): India imports approximately 85% of its crude oil requirements, making the import bill highly sensitive to international price movements.
Select the correct answer:
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