As PM Modi calls for conserving FX, what steps can India take?

With surging crude oil prices and a weakening rupee driven by the geopolitical fallout of the Iran conflict, the government has begun examining a range of me...

What Happened

With surging crude oil prices and a weakening rupee driven by the geopolitical fallout of the Iran conflict, the government has begun examining a range of measures to conserve and attract foreign exchange.
The Prime Minister publicly called on citizens to reduce discretionary import-linked expenditure — including gold purchases and international travel — framing these as acts of economic patriotism.
Policymakers and the Reserve Bank of India are weighing a mix of demand-suppression measures (curbing non-essential imports) and supply-augmentation measures (attracting dollar inflows through NRI deposits and capital account liberalisation).
Historical precedents being revisited include special NRI bond issuances (similar to the Resurgent India Bonds of 1998), easing of foreign portfolio investment limits, and incentivising diaspora remittances.
India's foreign exchange reserves, which peaked at approximately $728 billion in February 2026, have since declined to around $691 billion by early May 2026 — a fall of roughly $37 billion — partly due to RBI interventions to support the rupee.

Static Topic Bridges

Balance of Payments (BoP) and Its Components

The Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a given period. It is divided into three accounts: the Current Account (trade in goods, services, primary income, and secondary income including remittances), the Capital Account (capital transfers and acquisition/disposal of non-produced assets), and the Financial Account (foreign direct investment, portfolio investment, other investment, and reserve assets). When a country faces a BoP stress — particularly on the current account — it must either finance the deficit through capital inflows or draw down its foreign exchange reserves.

India's current account deficit (CAD) widened to $13.2 billion (1.3% of GDP) in Q3 FY26 (October–December 2025).
The merchandise trade deficit widened to $93.6 billion in Q3 FY26, driven by elevated gold and silver imports alongside dampened export growth.
India's net invisibles — services exports (especially IT), primary income, and remittances — are the primary structural offset to the merchandise trade deficit.
India received USD 135.46 billion in remittances in FY 2024-25, the highest ever for any country globally and growing 14% year-on-year (RBI data / PIB).

Connection to this news: The call to conserve foreign exchange is a direct response to widening BoP pressure — both on the current account (oil import bill) and on the financial account (rupee depreciation leading to reserve drawdown). Policy options aim to simultaneously compress the current account deficit and boost capital inflows.

FEMA 1999 and India's Capital Account Management Framework

India's management of cross-border capital flows is governed by the Foreign Exchange Management Act (FEMA), 1999, which replaced the Foreign Exchange Regulation Act (FERA), 1973. FEMA came into force on June 1, 2000, and represents a fundamental policy shift — from treating foreign exchange violations as criminal offences (under FERA) to treating them as civil offences. Under FEMA, current account transactions are generally permitted unless expressly prohibited, while capital account transactions are prohibited unless expressly permitted. The Reserve Bank of India, under FEMA, regulates capital flows through sectoral limits, approval conditions, and instruments such as the External Commercial Borrowings (ECB) framework and the Liberalised Remittances Scheme (LRS).

FEMA, 1999 received presidential assent on December 29, 1999, and came into force on June 1, 2000.
India maintains partial capital account convertibility — the current account is fully convertible but the capital account is only partially liberalised, with RBI retaining regulatory discretion.
The Liberalised Remittances Scheme (LRS) allows resident Indians to remit up to $250,000 per financial year for permissible current and capital account transactions; its utilisation is a key indicator of demand for foreign exchange.
Tightening the LRS or imposing Tax Collected at Source (TCS) on LRS remittances is one instrument the government can use to reduce outbound foreign exchange flows.

Connection to this news: The policy options being considered — easing NRI investment caps, attracting diaspora bond subscriptions, and potentially restricting import categories — all operate within or through the FEMA framework, giving the RBI and government significant legal latitude to act quickly.

Diaspora Bonds and Special NRI Deposit Schemes as Crisis Instruments

India has historically deployed special sovereign bond instruments targeting its large non-resident diaspora to attract dollar inflows during periods of external stress. The Resurgent India Bonds (RIBs) of 1998, issued by the State Bank of India following international sanctions after nuclear tests, raised $4.2 billion. The India Millennium Deposits (IMDs) of 2000 raised approximately $5.5 billion. The FCNR(B) special swap scheme of 2013, when the rupee depreciated sharply, raised about $26 billion. These instruments offer NRIs above-market interest rates on foreign currency deposits, with the government/RBI absorbing the currency risk through swaps.

FCNR(B) — Foreign Currency Non-Resident (Bank) accounts allow NRIs to hold deposits in foreign currency in Indian banks; interest is repatriable and the principal is not exposed to rupee exchange rate risk.
NRE (Non-Resident External) accounts are held in rupees but are fully repatriable and tax-free in India.
India's diaspora numbers approximately 32 million non-resident Indians and persons of Indian origin — the world's largest diaspora — making targeted bond/deposit schemes a meaningful capital-raising tool.
In Budget 2026, India also doubled individual investment ceilings for overseas investors in listed Indian companies, signalling incremental capital account liberalisation.

Connection to this news: The revival of diaspora bond/deposit instruments is among the most historically proven mechanisms for rapidly mobilising dollar inflows without distorting domestic monetary conditions — making it a likely first-response tool in the current environment.

Key Facts & Data

India's forex reserves: peaked at ~$728 billion (February 2026); fell to ~$691 billion by early May 2026.
Forex reserves decline since peak: approximately $37 billion — partly due to RBI rupee-support interventions.
India's current account deficit: $13.2 billion (1.3% of GDP) in Q3 FY26 (October–December 2025).
India's remittances in FY 2024-25: USD 135.46 billion — highest for any country globally (PIB/RBI data).
Merchandise trade deficit (Q3 FY26): $93.6 billion, up from $79.3 billion a year earlier.
FEMA, 1999: came into force June 1, 2000; replaced FERA, 1973.
LRS annual limit for resident Indians: $250,000 per financial year.
Resurgent India Bonds (1998): raised $4.2 billion; FCNR(B) special swap (2013): raised ~$26 billion.
India's diaspora: approximately 32 million NRIs and persons of Indian origin globally.
IMF projection for India's CAD: could widen to USD 84.5 billion (~2% of GDP) in 2026.