PM Modi's Austerity Call and the Battle to Stabilise the Rupee

Source: The Hindu

Introduction 

India's external sector has come under mounting stress due to escalating geopolitical tensions in West Asia, surging crude oil prices, rising gold imports, and heavy outward remittances for overseas travel. Against this backdrop, Prime Minister Narendra Modi has appealed to citizens to adopt austerity measures by reducing non-essential spending on imported goods and avoiding discretionary foreign travel. India's foreign exchange reserves fell by nearly $38 billion within two months of the West Asia conflict escalating, further compounded by sustained capital outflows from foreign institutional investors (FIIs).

Quick Summary 

• India's forex reserves fell by nearly $38 billion within two months of the West Asia conflict escalating. 
• The rupee crossed the 95 mark against the US dollar, raising external sector alarm. 
• Gold imports nearly doubled from $35 billion in 2022–23 to $72 billion in 2025–26. 
• India's Current Account Deficit (CAD) widened to $13.2 billion (1.3% of GDP) in the December quarter of 2025. 
• Outward remittances under LRS stood at $29.56 billion in FY25, with foreign travel accounting for more than half. 
• India recorded 32.71 million outbound travellers in 2025 against only 9.02 million inbound foreign tourists. 
• Crude oil prices surpassed $100 per barrel amid West Asia tensions. 
• FIIs withdrew approximately Rs. 1.97 lakh crore from Indian markets between January and May 2026. 
• PM Modi urged citizens to reduce gold purchases, avoid foreign travel, and adopt EVs and public transport.

Forex Reserves and the Rupee Under Stress 

• Foreign exchange reserves are assets held by the Reserve Bank of India (RBI) in foreign currencies, gold, Special Drawing Rights (SDRs), and reserve positions with the IMF.  
• They serve as a buffer for currency stability and external shock absorption. India's forex reserves have declined to nearly $691 billion, while the rupee has depreciated past the 95 mark against the US dollar.  
• The decline is attributed to rising crude oil and gold import bills, outward remittances under the Liberalised Remittance Scheme (LRS), and FII outflows of approximately Rs. 1.97 lakh crore between January and May 2026.

Gold Imports and the Current Account Deficit 

• Gold imports have emerged as a primary driver of external sector stress. India's gold import bill rose to nearly $72 billion in 2025–26, almost doubling from $35 billion in 2022–23.  
• As the world's second-largest gold consumer, India's demand is driven by jewellery consumption, cultural preferences, and investment appetite.  
• This has widened the Current Account Deficit (CAD) to $13.2 billion, equivalent to 1.3% of GDP, in the December quarter of 2025.  
• Switzerland accounts for approximately 40% of India's gold imports, followed by the UAE and South Africa. Experts have called for strengthening the Gold Monetisation Scheme (GMS) — which allows individuals to deposit idle gold with banks — to reduce dependence on fresh imports and conserve foreign exchange.

Overseas Spending and the LRS Outflow 

• The Liberalised Remittance Scheme (LRS), introduced by the RBI to facilitate permissible outward remittances for education, medical treatment, investment, and travel, has become a significant source of forex outflow.  
• Outward remittances under LRS stood at $29.56 billion in FY25, with foreign travel accounting for more than half.  
• PM Modi specifically flagged overseas tourism, destination weddings, and luxury discretionary spending, urging citizens to postpone avoidable foreign travel for at least one year and prioritise domestic tourism. India recorded 32.71 million outbound travellers in 2025 against only 9.02 million inbound foreign tourists, with forex earnings from tourism declining 6.6% during the year.

Crude Oil Dependence and Inflationary Risk 

• India imports over 85% of its crude oil requirements, making it acutely vulnerable to global price fluctuations.  
• West Asia tensions and uncertainty around the Strait of Hormuz have pushed crude prices above $100 per barrel, leading to rising fuel costs, imported inflation, and fiscal pressure on state-owned oil marketing companies — Indian Oil, Bharat Petroleum, and Hindustan Petroleum — which are facing significant under-recoveries.  
• PM Modi encouraged greater adoption of electric vehicles (EVs), public transportation, carpooling, and work-from-home arrangements to reduce fuel dependence.

Key Legislations 

• Foreign Exchange Management Act, 1999 (FEMA) — Governs all foreign exchange transactions, including the LRS framework. 
• Reserve Bank of India Act, 1934 — Empowers the RBI to manage forex reserves and monetary policy. 
• Customs Act, 1962 — Regulates gold imports and applicable import duties. 
• Foreign Trade (Development and Regulation) Act, 1992 — Governs import restrictions on commodities including gold and petroleum. 
• Petroleum and Natural Gas Regulatory Board Act, 2006 — Regulates the downstream petroleum sector and oil marketing companies. 
• Energy Conservation Act, 2001 (amended 2022) — Provides the framework for energy efficiency and EV transition. 
• Gold Monetisation Scheme, 2015 — Notified under FEMA to mobilise idle household gold and reduce import dependence.

Conclusion 

PM Modi's austerity appeal reflects deepening concerns over India's external sector vulnerabilities — declining forex reserves, a widening current account deficit, and sustained capital outflows. Gold imports, overseas travel, and crude oil dependence have collectively strained India's currency and macroeconomic stability. Managing these pressures through prudent consumption, domestic production, and energy transition will be critical for India's economic resilience in the period ahead.