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

Indian Prime Minister Narendra Modi has urged citizens to adopt practices to conserve foreign exchange as Asia's third-largest economy grapples with the fallout from the Iran war-driven spike in oil prices, which has piled pressure on the rupee and depleted FX reserves.

Modi on Sunday said Indians should aim to conserve fuel and fertilisers while avoiding foreign travel and gold purchases. The address "signals a potential policy shift ahead," Nomura said in a Monday note.

The rupee dropped to a record low against the dollar last week amid the most severe energy supply disruption in history. Higher crude prices are particularly detrimental for India, which imports 90% of its oil requirements and about 50% of its gas needs.


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The Reserve Bank of India has sold dollars from its FX reserves to defend the currency, cracked down on arbitrage activity and is considering measures to shore up dollar inflows.

Here are some of the measures that policymakers adopted in the past, which analysts say could be revived to tackle the ongoing crisis.

DIASPORA DEPOSITS, BONDS
The central bank deployed such steps between 1998 and 2000 and in 2013 to attract dollar inflows from non-resident Indians.

In 2013, the measures attracted $26 billion of inflows after the RBI offered a concessional swap window to attract FX deposits from overseas Indians. The move helped reverse the rupee's depreciation trajectory, although it carried a cost as the RBI offered subsidised FX hedges to banks against those deposits.

CAPITAL ACCOUNT EASING
To attract dollar inflows during periods of stress, the RBI previously eased norms for overseas borrowings by domestic firms and relaxed rules for foreign portfolio investment (FPI).

Earlier this year, the central bank eased requirements for overseas borrowings. To encourage portfolio inflows, India may consider steps such as lowering FPI limits and minimum maturity requirements, according to Standard Chartered.

Analysts said policymakers could also consider tweaking long-term capital gains taxes on overseas returns from portfolio investments.

CURBING IMPORTS
To tackle problems on account of elevated FX demand, policymakers have in the past raised import taxes on gold, other precious metals and non-essential imports, alongside tightening documentation requirements and quantitative restrictions.

Such measures were adopted as recently as 2022 when India raised customs duties on gold by 5 percentage points to dampen demand.

OIL DEMAND WINDOW
To limit the impact of oil-related dollar demand, policymakers previously carved out dedicated swap windows to route oil refiners' dollar demand.

While the RBI has not yet opened a swap window, it has nudged oil refiners to use a special credit facility for their FX needs, Reuters reported last month.

TIGHTER OVERSEAS REMITTANCE LIMITS
Policymakers can also curb FX outflows by lowering remittance limits under India's liberalised remittance scheme, which currently stands at $250,000.

The scheme spans categories such as travel, education and investments, with data pointing to a sharp pick-up in travel-related spending since 2022.

Policymakers had tightened the limit in 2013, while in 2018, regulatory scrutiny of such remittances was increased.

MONETARY POLICY DEFENCE
Raising borrowing costs is among the most traditional ways to fight persistent weakness in the currency but also runs the risk of hurting growth, already strained by a supply-side shock.

While economists see a low probability of the RBI using this route, history shows that rate hikes were implemented across periods of severe FX weakness between 1997 and 2022. Interest rate swap markets are currently pricing 70 basis points of hikes over the next 12 months.