Remittances anchor the rupee, India’s external balances, Pg7

Key Highlights:

• The Indian rupee has depreciated by approximately 12% against the U.S. dollar since May 2025.
• A decline in net Foreign Direct Investment (FDI) began in Q2 of 2021-2022, while net Foreign Portfolio Investment (FPI) started declining in Q4 of 2023-24.
• In 2024, India received $138 billion in remittances, the highest in the world.
• Remittances have consistently financed a significant portion, often the entirety, of India’s trade deficit since mid-2013.

Detailed Insights:

• The depreciation pressure on the rupee is structurally linked to India’s persistent Current Account (CA) deficit, primarily due to the country's ongoing trade deficit.
• Net remittances, averaging around 3% of India's Gross Domestic Product (GDP), surpass net FDI and FPI flows in significance for financing the CAD.
• Unlike FPI, remittances are less prone to sudden stops, being driven by the income and savings decisions of the Indian diaspora and their families' needs.
• Remittances are transfers, not claims, and do not create future liability outflows, setting them apart from FDI and FPI.
• A potential decrease in remittance flows, combined with a widening trade deficit due to higher energy import costs, could strain India's Current Account Deficit (CAD) financing.

Key Concepts Involved:

• Foreign Direct Investment (FDI): Investment made by a firm or individual in one country into business interests located in another country.
• Foreign Portfolio Investment (FPI): Investment in the financial assets of a foreign country such as stocks or bonds.
• Current Account (CA): Part of the balance of payments that reflects all payments between countries for goods, services, and income.