Editorials/Opinions Analysis For UPSC 28 January 2026

Content

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

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

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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.

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.

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Fuel Efficiency Norms for Light Commercial Vehicles (LCVs)

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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.

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.

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