VidBodh AcademyThe art and science of civil services preparation
Student login

Economy › External sector

हिन्दी — Read in Hindi

Balance of payments, the rupee and reserves

India's accounts with the world: trade, capital flows, the rupee and the reserves.

Showing 2 of 3 articles, those that changed from 1 to 30 June 2026.Show all

Defending the rupee

Copy link to Defending the rupee

Prelims and Mains

LeadDefending the rupee: the capital flows packageJune 2026

Why in news

On 5 June 2026 the Centre and the Reserve Bank announced a joint package to draw foreign money into India. Foreign portfolio investors no longer pay income tax on government bonds, and banks were given an incentive to raise foreign currency deposits from non residents.

Background

  • India imports more than it exports in goods. Services exports and remittances cover much of the gap; the rest is the current account deficit, which must be paid for by capital coming in.
  • In 2026 costlier oil widened the import bill, and foreign portfolio investors pulled money out. The rupee fell.
  • The rupee's rate has been market determined since March 1993. The Reserve Bank steps in to curb sharp swings, not to defend a level.
  • India has done this before: in 2013, during the "taper tantrum", a similar window brought in about 34 billion dollars.

The three parts of the package

  • Tax: an ordinance exempted foreign portfolio investors from tax on interest and capital gains from government securities.
  • Access: more government bonds were opened to foreigners without limit under the Fully Accessible Route.
  • Deposits: the Reserve Bank offered banks a cheap swap for dollars raised through Foreign Currency Non Resident (FCNR) deposits with banks, FCNR(B), and overseas borrowing.

How the swap window works

  • A non resident Indian places dollars with an Indian bank for three to five years.
  • The bank hands the dollars to the Reserve Bank and takes rupees, with a promise to reverse the deal later at a rate fixed today.
  • The Reserve Bank's reserves rise, and the rupee is supported without the Reserve Bank selling dollars. The bank is covered against a fall in the rupee on the principal.
  • The cheap swap is a subsidy: it lets the bank offer the depositor an attractive rate.

What it buys, and what it costs

  • It steadied the rupee. By late July the Governor could say the rupee was undervalued on fundamentals.
  • But these inflows are debt. They must be repaid, with interest, in three to five years.
  • Hot money: bond investors can leave as quickly as they came.
  • The tax exemption costs revenue, and it was made by ordinance, which Parliament had to approve later.
  • Stable capital is foreign direct investment, and net inflows of it were low in 2025-26.

The way forward

  • Treat the package as a bridge. The lasting cure is a smaller oil bill and larger exports.
  • Draw equity and direct investment, which do not have to be repaid.
  • Keep the share of short term debt low, since that is what turns pressure into a crisis.

Prelims facts

  • FCNR(B) deposits are in foreign currency; Non Resident External (NRE) deposits are in rupees and fully repatriable.
  • The Fully Accessible Route was introduced in 2020.
  • The Reserve Bank's main effective exchange rate index uses a basket of 40 currencies.
  • Export proceeds must now be brought home within nine months.
  • The rupee has been market determined since March 1993.

Open the lead on its own page

India imports more than it exports in goods. Services exports and remittances cover much of the gap; the rest is the current account deficit, which must be paid for by capital coming in.

What changed

  1. 5 Jun 2026LeadDefending the rupee: the capital flows package

Show history (2 other updates)

  1. 18 Aug 2026newly added

    • The Taxation and Other Laws (Amendment) Act, 2026 received assent on 17 August and replaced the ordinance of 5 June that exempted foreign investors' interest and capital gains on government securities from tax.
    • On 14 August the Reserve Bank brought forward the close of the deposit swap window from 30 September to 31 August.

    The Hindu, 18 Aug 2026: Amendment to Taxation Act, Payment and Settlement Systems Act get President's assent (opens in a new tab) · PRS Legislative Research, 17 Aug 2026: Bill track: The Taxation and Other Laws (Amendment) Bill, 2026 (opens in a new tab) · Reserve Bank of India, 2 Sep 2026: Press release on forex inflows under the swap facility (opens in a new tab)

  2. 26 Jul 2026newly added

    • The Reserve Bank Governor said the rupee was not overvalued and could be seen as undervalued in both nominal and real effective terms.
    • Banks had raised nearly US$32 billion through the swap window, mostly as Foreign Currency Non Resident (Bank) deposits, adding to reserves without the Reserve Bank selling dollars.

    The Hindu, 26 Jul 2026: RBI sees rupee as undervalued; inflows largely through FCNR(B) touch $32 billion (opens in a new tab) · Reserve Bank of India, 20 Jul 2026: Press release on mobilisation under the swap facility (opens in a new tab)

Trade and the current account

Copy link to Trade and the current account

Prelims

The goods trade deficit is the gap between merchandise imports and exports, and the current account adds trade in services, remittances and investment income.

  • The Commerce Ministry releases merchandise and estimated services trade data around the middle of each month.
  • The Reserve Bank of India publishes the balance of payments, including the current account, and India's external debt every quarter.
  • India usually runs a deficit on goods, partly offset by a surplus on services and by remittances, so the current account deficit has generally stayed between 1 and 2 per cent of GDP.

What changed

  1. 30 Jun 2026Briefnewly addedThe goods trade deficit for May 2026 was 28.21 billion dollars, as imports outran record exports. The current account showed a surplus of 7.1 billion dollars in January to March 2026, as services and remittances covered the goods deficit. For 2025-26 as a whole the current account deficit was 0.6 per cent of GDP. External debt stood at 762.8 billion dollars at the end of March 2026. Reserve Bank of India, 8 Jun 2026: Balance of payments for January to March 2026 (opens in a new tab) · The Hindu, 15 Jun 2026: Goods exports hit record high of $45.2 billion in May 2026 (opens in a new tab) · The Indian Express, 30 Jun 2026

Show history (3 other updates)

  1. 15 Sep 2026Briefnewly addedThe goods trade deficit for August 2026 narrowed to 26.86 billion dollars, as exports rose sharply. The current account deficit for April to June 2026 was 4.2 billion dollars, 0.5 per cent of GDP. The Hindu, 15 Sep 2026: India's 26% goods exports surge lowers August 2026 trade deficit (opens in a new tab) · Reserve Bank of India, 1 Sep 2026: Developments in India's balance of payments during April to June 2026 (opens in a new tab)

  2. 13 Aug 2026Briefnewly addedThe goods trade deficit for July 2026 was 31.98 billion dollars, a six month high, though exports grew nearly 20 per cent. The Hindu, 13 Aug 2026: Goods exports surged 20% in July 2026 on West Asia recovery and further diversification (opens in a new tab)

  3. 13 Jul 2026Briefnewly addedThe goods trade deficit for June 2026 widened to 30.4 billion dollars, as imports rose on costlier crude oil, gold and electronics. The Hindu, 13 Jul 2026: Trade deficit jumps 430% in June 2026 (opens in a new tab)

Also filed elsewhere

Download a copy

Every article on this page, in full.