Content

1. Rupee Depreciation Amid Macroeconomic Stability: Causes, Concerns, and Policy Options
2. Fuel Efficiency Norms for Light Commercial Vehicles (LCVs)

Rupee Depreciation Amid Macroeconomic Stability: Causes, Concerns, and Policy Options

Why is it in News?

• Despite strong macroeconomic fundamentals, the Indian rupee has depreciated nearly 6% since April 2025, triggering market anxiety and public debate on exchange-rate management.
• The fall coincides with U.S. tariff actions against India, raising concerns that geopolitical and diplomatic pressures, not economic weaknesses, are driving capital outflows and currency instability.

Relevance

GS 3 (Economy):

• Core relevance to exchange rate management, capital flows, balance of payments, monetary policy limits, REER, and external sector vulnerability despite strong fundamentals.

Practice Questions

• Despite strong macroeconomic fundamentals, the Indian rupee has witnessed sharp depreciation. Analyse the causes and discuss why capital outflows, rather than trade deficits, are driving this trend. (15 marks)

Macroeconomic Context — Fundamentals Remain Strong

Growth, Inflation, and External Balance

• India’s real GDP growth for the current year is estimated at 7.4%, placing it among the fastest-growing major economies globally.
• CPI inflation ended 2025 at 1.33%, below the RBI’s lower tolerance band for four consecutive months, indicating strong price stability.
• Current account deficit in H1 2025–26 stood at just 0.76% of GDP, significantly lower than 1.35% in the previous year.

Extent and Nature of Rupee Depreciation

Recent Trends

• Since April 2025, the rupee has depreciated by about 6%, despite low inflation and modest current account pressures.
• This contrasts with 2022, when nearly 10% depreciation was driven by economic factors such as aggressive U.S. Federal Reserve rate hikes.

Trade Deficit Not the Primary Cause

• India’s merchandise and services trade deficit during April–December 2025 was $96.58 billion, only moderately higher than $88.43 billion in the same period last year.
• The size of the trade deficit alone does not explain the sharp downward pressure on the rupee.

The Real Villain — Capital Outflows

Reversal of Capital Flows

• Net capital inflows of $10.6 billion in April–December 2024 turned into net outflows of $3.9 billion during the same period in 2025.
• Portfolio investors reacted sharply to heightened geopolitical uncertainty and policy unpredictability, accelerating outflows from equity and debt markets.

U.S. Tariff Actions and Investor Sentiment

• The U.S. imposed a cumulative 50% tariff on Indian exports, citing reciprocal trade concerns and India’s crude imports from Russia.
• Threats of an additional 25% tariff linked to trade with Iran, though Iran accounts for only 0.15% of India’s total trade, amplified market fears disproportionately.

From Economics to Diplomacy — Nature of the Shock

Non-Economic Drivers of Currency Pressure

• Unlike conventional currency depreciation driven by inflation differentials or interest-rate gaps, current rupee weakness is rooted in geopolitical signalling and diplomatic uncertainty.
• Tariffs are being weaponised as tools of foreign policy, shifting the resolution space from macroeconomic management to diplomatic negotiation.

Risk of Self-Reinforcing Capital Flight

• Every incremental fall in the rupee raises required rupee returns for foreign investors, increasing the likelihood of further capital outflows.
• Equity sell-offs linked to capital flight directly depress stock markets, tightening financial conditions domestically.

RBI’s Role and Exchange Rate Management

India’s Exchange Rate Regime

• Since 1993, India follows a market-determined exchange rate regime, with RBI intervention aimed at reducing volatility rather than pegging the rupee.
• Volatility management has implicitly included moderating sharp depreciations to prevent disruptive macroeconomic shocks.

Limits of Monetary Intervention

• RBI intervention cannot counter sustained capital outflows driven by non-economic fears; it can only smoothen the pace of depreciation.
• Asymmetric intervention, while reducing volatility, inevitably influences exchange-rate levels, warranting greater transparency in RBI communication.

Why Devaluation Is Not a Solution ?

Limited Export Gains

• Rising import content of Indian exports dilutes competitiveness gains from a weaker rupee in global markets.
• High U.S. tariffs negate potential price advantages for Indian exporters, especially in the American market.

Inflationary Risks on Imports

• About 25% of India’s merchandise imports consist of crude oil, making depreciation inflationary through higher fuel and input costs.
• With India’s inflation already lower than many advanced economies, deliberate devaluation lacks economic justification.

Real Effective Exchange Rate (REER) Perspective

• Exchange-rate correction is warranted primarily when domestic inflation diverges significantly from trading partners, assessed through the REER framework.
• Artificial undervaluation, as seen in some economies, risks being labelled currency manipulation, inviting trade retaliation and reputational costs.

Way Forward — Policy and Diplomacy

Diplomatic Resolution as Primary Lever

• Early trade and tariff resolution with the U.S. is critical to restoring investor confidence and reversing capital outflows.
• Diplomatic engagement, not monetary adjustment, remains the most effective instrument to stabilise the rupee under current conditions.

Role of RBI and Domestic Policy

• RBI should continue calibrated intervention to smoothen volatility while clearly communicating its policy intent to anchor market expectations.
• Strengthening domestic financial markets and maintaining macroeconomic credibility can mitigate secondary spillovers from external shocks.

Conclusion

• The current rupee depreciation reflects confidence shocks driven by geopolitics rather than economic fragility, marking a shift from macroeconomic to diplomatic determinants of currency stability.
• Until capital outflows reverse through external engagement, the RBI can only manage volatility, underscoring the primacy of trade diplomacy in safeguarding macroeconomic stability.

Fuel Efficiency Norms for Light Commercial Vehicles (LCVs)

Why is it in News?

• In July 2025, the Bureau of Energy Efficiency (BEE) released a draft proposal introducing fuel consumption and CO₂ emission standards for LCVs for the 2027–2032 period.
• This marks India’s first regulatory intervention for sub-3.5 tonne commercial vehicles, long excluded from CAFE norms despite rapid growth driven by e-commerce and logistics.

Relevance

GS 3 (Environment, Economy, Science & Tech):

• Direct relevance to climate change mitigation, clean mobility, emission standards, industrial transition, EV adoption, and balancing decarbonisation with affordability.

Practice Questions

• Light Commercial Vehicles have remained a blind spot in India’s clean transport policies. Examine how the proposed fuel efficiency norms can reshape India’s decarbonisation pathway. (15 marks)

Background — A Regulatory Blind Spot

Passenger Cars vs LCVs

• India has regulated passenger cars through CAFE norms, setting fleet-wide CO₂ targets, but LCVs operated without fuel efficiency mandates for years.
• LCVs are highly utilised, clocking more kilometres per day than private cars, amplifying their cumulative emissions impact.

Scale of the LCV Challenge

Market Size and Electrification Gap

• LCVs accounted for 48% of India’s commercial goods vehicles in 2024, making them central to freight and last-mile delivery.
• Electrification remains extremely low at just 2%, highlighting a major gap in India’s clean mobility transition.

Emissions Profile of LCVs

Current CO₂ Intensity

• India’s LCV fleet averaged 147.5 g CO₂/km in 2024.
• Without the marginal 2% share of electric LCVs, emissions would rise to 150 g CO₂/km, underscoring the outsized impact of even limited electrification.

Automaker Resistance and Policy Signal

Industry Pushback

• Automakers lobbied for full exemption of LCVs from fuel efficiency standards, citing price sensitivity and high costs of upgrading ICE technologies.
• The government rejected the demand, signalling strong commitment to transport decarbonisation and regulatory parity across vehicle segments.

Electric LCV Market — Current Reality

Technology and Cost Constraints

• Existing e-LCV models typically offer sub-35 kWh battery packs with maximum ranges of ~150 km, reflecting cautious manufacturer entry.
• Most conventional LCVs cost below ₹10 lakh, while BEV equivalents exceed this threshold, creating a steep upfront cost barrier.

Incentive Inconsistencies

• Central schemes like PM E-DRIVE exclude LCVs, weakening demand signals.
• Select States such as Maharashtra and Madhya Pradesh offer incentives, partially offsetting acquisition costs but lacking nationwide uniformity.

Fuel Efficiency Standards and Electrification Dynamics

Lessons from Passenger Cars

• After 8 years of CAFE norms, BEVs constitute only ~3% of India’s passenger car fleet, illustrating the limits of lax standards.
• When standards are weak, manufacturers prefer incremental ICE optimisation over investing in electrification.

The Critical CO₂ Threshold

• ICCT research identifies 116.5 g CO₂/km as the tipping point where electrification becomes more cost-effective than ICE-only compliance.
• BEE’s proposed standard of 115 g CO₂/km marginally crosses this threshold, enabling but not strongly incentivising e-LCV adoption.

Role of Super Credits and Compliance Design

Super Credit Mechanism

• Super credits count each BEV multiple times for compliance, lowering effective fleet emissions on paper and making electrification economically attractive.
• Regions like China, the EU, and the US have used super credits to accelerate early-stage EV adoption.

India’s Draft Proposal — Mixed Signals

• The draft assigns zero CO₂ value to e-LCVs and introduces super credits, supporting BEV entry.
• However, extending credits to hybrids and select ICE technologies risks delaying full electrification by enabling compliance without BEVs.

Risk of Repeating Passenger Car Mistakes

• Continued incentives for hybrids and ICE offsets may prolong ICE dominance, fragment markets, and weaken long-term decarbonisation outcomes.
• Evidence from passenger cars shows that relaxed standards and prolonged transitional incentives stall electrification at low levels.

Way Forward — Policy Design Imperatives

Strengthening Standards

• Emission targets must be stringent enough to make electrification the least-cost compliance pathway, not merely one option among many.

Strategic Incentive Use

• Super credits should be temporary and BEV-focused, with a clear phase-out timeline as battery costs decline and volumes scale up.

Policy Coordination

• Aligning central incentives with State EV policies can reduce upfront cost barriers and unlock scale economies for e-LCV manufacturing.

Conclusion

• With 48% fleet share and only 2% electrification, LCVs represent India’s largest untapped decarbonisation opportunity in road transport.
• Smart regulation, stringent standards, and disciplined incentive design will determine whether LCVs catalyse clean mobility or replicate the slow transition seen in passenger cars.