DAILY CURRENT AFFAIRS, 01 APRIL 2026

HEATWAVE

1. Context

North India is likely to experience a cooler-than-normal summer this time, while other parts of the country may see more number of heatwave days, the India Meteorological Department (IMD) said on Tuesday.

2. What is a Heat Wave?

A heatwave is a period of abnormally high temperatures, a common phenomenon in India during the months of May-June and in some rare cases even extends till July.
Indian Meteorological Department (IMD) classifies heat waves according to regions and temperature ranges. As per IMD, the number of heatwave days in India has increased from 413 over 1981-1990 to 600 over 2011-2020.
This sharp rise in the number of heatwave days has resulted due to the increasing impact of climate change.
The last three years have been La Niña years, which has served as a precursor to 2023 likely being an El Niño year. (The El Niño is a complementary phenomenon in which warmer water spreads westeast across the equatorial Pacific Ocean.)
As we eagerly await the likely birth of an El Niño this year, we have already had a heat wave occur over northwest India.
Heat waves tend to be confined to north and northwest India in El Niño years.

Image Source:News18

3. How do Heat waves Occur?

Heat waves are formed for one of two reasons warmer air is flowing in from elsewhere or it is being produced locally.
It is a local phenomenon when the air is warmed by higher land surface temperature or because the air sinking down from above is compressed along the way, producing hot air near the surface.
First of all, in spring, India typically has air flowing in from the westnorthwest. This direction of airflow is bad news for India for several reasons.
Likewise, air flowing in from the northwest rolls in over the mountains of Afghanistan and Pakistan, so some of the compression also happens on the leeward side of these mountains, entering India with a bristling warmth.
While air flowing over the oceans is expected to bring cooler air, the Arabian Sea is warming faster than most other ocean regions.
Next, the strong upper atmospheric westerly winds, from the Atlantic Ocean to India during spring, control the near-surface winds.
Any time winds flow from the west to the east, we need to remember that the winds are blowing faster than the planet which also rotates from west to east.
The energy to run past the earth near the surface, against surface friction, can only come from above. This descending air compresses and warms up to generate some heat waves.

4. Impacts of heat waves in India

The frequent occurrence of heat waves also adversely affects different sectors of the economy.
For instance, the livelihood of poor and marginal farmers is negatively impacted due to the loss of working days.
Heatwaves also have an adverse impact on daily wage workers' productivity, impacting the economy.
Crop yields suffer when temperatures exceed the ideal range.
Farmers in Haryana, Punjab, and Uttar Pradesh have reported losses in their wheat crop in the past rabi season. Across India, wheat production could be down 6-7% due to heat waves.
Mortality due to heat waves occurs because of rising temperatures, lack of public awareness programs, and inadequate long-term mitigation measures.
According to a 2019 report by the Tata Center for Development and the University of Chicago, by 2100 annually, more than 1.5 million people will be likely to die due to extreme heat caused by climate change.
The increased heat wave will lead to an increase in diseases like diabetes, circulatory and respiratory conditions, as well as mental health challenges.
The concurrence of heat and drought events is causing crop production losses and tree mortality. The risks to health and food production will be made more severe by the sudden food production losses exacerbated by heat-induced labor productivity losses.

These interacting impacts will increase food prices, reduce household incomes, and lead to malnutrition and climate-related deaths, especially in tropical regions.

5. How does air mass contribute to heat waves?

The other factors that affect the formation of heat waves are the age of the air mass and how far it has traveled.
The north northwestern heatwaves are typically formed with air masses that come from 800-1600 km away and are around two days old.
Heat waves over peninsular India on the other hand, arrive from the oceans, which are closer (around 200-400km) and are barely a day old. As a result, they are on average less intense.

6. Way ahead for Heat waves

Identifying heat hot spots through appropriate tracking of meteorological data and promoting timely development and implementation of local Heat Action Plans with strategic inter-agency coordination, and a response that targets the most vulnerable groups.
Review existing occupational health standards, labor laws, and sectoral regulations for worker safety in relation to climatic conditions.
Policy intervention and coordination across three sectors health, water, and power are necessary.
Promotion of traditional adaptation practices, such as staying indoors and wearing comfortable clothes.
Popularisation of simple design features such as shaded windows, underground water storage tanks, and insulating house materials.
Advance implementation of local Heat Action Plans, plus effective inter-agency coordination is a vital response that the government can deploy in order to protect vulnerable groups.

For Prelims & Mains

For Prelims: Heat Wave, India Meteorological Department (IMD), El Nino, Equatorial Pacific Ocean, La Nina, Malnutrition, Heat Action Plans.

For Mains: 1. Examine the various adverse impacts caused by heat waves and how India should deal with them.

Previous Year Questions

1.What are the possible limitations of India in mitigating global warming at present and in the immediate future? (UPSC CSE 2010)

1. Appropriate alternate technologies are not sufficiently available.

2. India cannot invest huge funds in research and development.

3. Many developed countries have already set up their polluting industries in India.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 only

(d) 1, 2 and 3

Answer (a)

India faces challenges in addressing Global Warming: Developing and underdeveloped nations lack access to advanced technologies, resulting in a scarcity of viable alternatives for combating climate change. Being a developing nation, India relies partially or entirely on developed countries for technology. Moreover, a significant portion of the annual budget in these nations is allocated to development and poverty alleviation programs, leaving limited funds for research and development of alternative technologies compared to developed nations. Analyzing the statements provided: Statements 1 and 2 hold true based on the aforementioned factors. However, Statement 3 is inaccurate as the establishment of polluting industries by developed countries within India is not feasible due to regulations governing industrial setup

Mains

1.Bring out the causes for the formation of heat islands in the urban habitat of the world. (UPSC CSE Mains GS 1 2013)

Source: The Hindu

CASTE CENSUS

1. Context

With the first phase of Census 2027 set to launch this Wednesday, April 1, the Centre said that caste enumeration will be conducted during the second phase of the exercise, known as Population Enumeration (PE).

2. What is the Caste Census?

A caste census is a comprehensive survey or data collection effort that aims to gather detailed information about the caste composition of a population. This typically involves:

Counting individuals belonging to different caste groups
Collecting socio-economic data related to caste categories
Assessing the representation of various castes in different sectors

The caste system is particularly relevant in India, where it has historically played a significant role in social stratification. A caste census can provide insights into:

Population distribution across caste groups
Economic status of different castes
Educational levels and employment patterns
Representation in government jobs and political positions

In India, the last comprehensive caste census was conducted in 1931 during British rule. Since then, calls for a new caste census have been made periodically, with proponents arguing it would help in formulating more targeted welfare policies and ensuring equitable representation.

3. Why the Caste Census?

Historically, British India’s censuses from 1881 to 1931 recorded all castes. Post-Independence, the 1951 census excluded caste enumeration, except for SCs and STs, which continued to be recorded in every census. In 1961, the government allowed states to conduct their own OBC surveys and create state-specific OBC lists, as there were no central reservations for OBCs at that time

A caste census is essential for several reasons:

Social Necessity: Caste remains a fundamental social framework in India. Inter-caste marriages were just 5% in 2011-12. Caste surnames and markers are common, residential areas are segregated by caste, and caste influences the selection of election candidates and cabinet ministers.
Legal Necessity: Effective implementation of constitutionally mandated social justice policies, including reservations in elections, education, and public employment, requires detailed caste data. Despite the Constitution using the term 'class,' Supreme Court rulings have established caste as a significant criterion for defining a backward class, necessitating comprehensive caste-wise data to uphold reservation policies.
Administrative Necessity: Detailed caste data helps correct wrongful inclusions and exclusions within reserved categories, prevents dominant castes from monopolizing reserved benefits, and is essential for sub-categorizing castes and determining the creamy layer's income/wealth criteria.
Moral Necessity: The lack of detailed caste data has allowed a small elite among upper castes and dominant OBCs to disproportionately control the nation's resources, income, and power

4. Arguments against the Caste Census

There are several arguments against conducting a caste census:

Social Division: Some argue that a caste census would exacerbate social divisions, although India's social hierarchies have existed for nearly 3,000 years, predating census efforts. Since 1951, counting SCs and STs has not led to conflicts among these groups. Moreover, India’s census already includes data on religion, language, and region, which are equally, if not more, divisive than caste. Ignoring caste in the census will not eliminate casteism any more than excluding religion, language, and region data will eradicate communalism and regionalism.
Administrative Challenge: Some claim that a caste census would be administratively complex. However, unlike the concept of race, which can be ambiguous but is still counted in many countries like the U.S., caste identification in India is relatively clear. The government has successfully enumerated 1,234 SC castes and 698 ST tribes. Therefore, counting the approximately 4,000 other castes, most of which are specific to certain states, should not pose an insurmountable challenge.
Increased Reservation Demands: Critics suggest that a caste census could lead to more demands for reservations. However, detailed caste data could actually help manage these demands more effectively by providing a factual basis for discussions. This would enable policymakers to address reservation claims more objectively, such as those from Marathas, Patidars, and Jats. In contrast, governments often prefer vague data because it allows them to make arbitrary reservation decisions for electoral gain

5. The Case for Other Backward Caste (OBC) in Census

The Constitution allows reservations for OBCs in education (Article 15(4)) and public employment (Article 16(4)), similar to SCs and STs. Following the Mandal Commission's recommendations, OBCs also benefit from reservations in the Central government and its undertakings. The Supreme Court's ruling in the Indra Sawhney case (1992) emphasized that the OBC list, originally based on the 1931 Census, should be updated regularly.
Unlike SCs and STs, OBCs do not have reserved electoral constituencies for MPs and MLAs. However, the 73rd and 74th Constitutional amendments (1993) introduced reservations for OBCs in panchayats and municipalities (Articles 243D(6) and 243T(6)). To implement this effectively, detailed caste and area-wise Census data of OBCs is necessary, which the government should have collected in the 2001 Census but did not.
When states like Uttar Pradesh, Madhya Pradesh, Gujarat, Maharashtra, Karnataka, Odisha, and Jharkhand attempted to implement OBC reservations in local elections, courts halted these efforts due to the lack of caste-wise OBC data. The judiciary demands this data to uphold reservations, while the executive has avoided collecting it.
In contrast, the Supreme Court upheld the 10% reservation for economically weaker sections (EWS) among non-OBCs, SCs, and STs (mainly upper castes) in 2022 without empirical support. Given the EWS reservation, the Census should now include all castes, as it did until 1931.
Though the Census is a Union subject, the Collection of Statistics Act, 2008, allows States and local bodies to collect relevant data. States like Karnataka (2015) and Bihar (2023) have conducted caste surveys, but Census data holds more authority and is less disputed. The government's reluctance to include caste in the Census is both legally indefensible and administratively imprudent

6. Failures attempts of Caste Census

After extensive lobbying by OBC leaders, Parliament unanimously resolved in 2010, with support from both Congress and BJP, to include caste enumeration in the 2011 Census. The last such enumeration was in the 1931 Census, which recorded 4,147 castes in India, excluding the depressed classes/untouchables.
However, the Socio-Economic and Caste Census (SECC) of 2011 was poorly designed and executed, resulting in an absurd figure of 4.6 million castes, and its results were never released.
The failure of SECC-2011 can be attributed to its conduct outside the framework of the Census Act, 1948, which was not amended to include caste as a parameter. Instead, it was managed by the Union Ministries of Rural Development and Urban Development, which lacked experience in conducting sociological surveys.
Additionally, the questionnaire was poorly designed with open-ended questions about caste, causing confusion among enumerators who struggled to differentiate between genuine castes, alternative names, larger caste groups, sub-castes, surnames, clan names, and gotras. In contrast, Bihar's 2023 Caste Survey provided a list of 214 specific caste names, with a 215th category labeled "Other Castes," resulting in more accurate data.
Despite the 2010 unanimous Parliamentary resolution, the Central government announced in 2021 that it would not include caste enumeration in the next Census.
It maintained this stance before the Supreme Court in response to a case filed by the Maharashtra government seeking the inclusion of OBCs in the 2021 Census. The Supreme Court's dismissal of Maharashtra's plea in December 2021 is contentious, given its own previous rulings

7. Way Forward

To address the failures of the SECC-2011, the Census Act of 1948 should be amended to mandate caste enumeration, removing the discretion from the Union executive. Caste should be included in the regular Census conducted by the Census Commissioner, with a few relevant questions added to the questionnaire. The government should also involve sociological and anthropological experts to create a draft list of castes specific to each state, publish this draft online for public feedback, and finalize it before distributing it to enumerators. The questionnaire should include questions about the respondent's sub-caste, caste, larger caste group, and caste surname. Using internet-enabled handheld devices preloaded with this information and limiting the enumerators' role to selecting the correct option will streamline the process and ensure accuracy.

States interested in caste enumeration should petition the Supreme Court to review its 2021 judgment. It is illogical to base OBC reservations on 1931 Census data and EWS reservations on no empirical data. The next Census must include caste enumeration

For Prelims: Socio-economic and caste census (SECC), Mandal Commission, Justice G Rohini's Commission, NITI Aayog, Article 341 and Article 342.

For Mains: 1. General Studies II: Welfare schemes for vulnerable sections of the population by the Centre and States and the performance of these schemes; mechanisms, laws, institutions and Bodies constituted for the protection and betterment of these vulnerable sections

Source: The Hindu

CARBON MARKET

1. Context

Not all greenhouse gases behave the same way. Some linger for centuries; others hit hard and fade fast. Yet climate policy has long treated them as broadly comparable, using a single yardstick. A new study argues that this may be skewing carbon markets, and undervaluing some of the quickest ways to slow warming today.

2. What is the Carbon Market?

A carbon market is a system where entities can buy and sell the right to release carbon into the atmosphere. If a government wishes to limit carbon emissions, it can issue carbon credits, which grant the holder permission to emit a specific amount of carbon dioxide.
Each carbon credit represents 1,000 kilograms of CO2. By controlling the number of credits issued, governments can regulate the overall level of carbon emissions.
It's important to note that those without carbon credits are not allowed to release carbon into the air.
The concept of carbon credits originated in the 1990s in the United States with the introduction of a cap-and-trade model to manage sulfur dioxide emissions.
Individuals and companies that possess carbon credits but do not require them can sell these credits to those who need them.
The market price of carbon credits is influenced by the forces of supply and demand. Additionally, carbon markets may involve trading carbon offsets, where businesses that pollute can buy offsets from environmental organizations.
These offsets typically represent projects like tree planting, which absorb a certain amount of carbon from the atmosphere to counterbalance emissions

3. Advantages of Carbon Markets

Pollution and climate change caused by carbon emissions exemplify what economists refer to as an externality. An externality occurs when the costs of an economic activity are not properly incorporated into the market price due to the lack of well-defined property rights.
For instance, a company that buys raw materials, like iron, must pay the supplier for the right to use the material, incurring a specific cost. However, when the same company releases carbon into the atmosphere, it typically doesn't have to compensate anyone for this emission.
Essentially, companies can release waste into the air without bearing any financial burden. This results in unchecked environmental pollution, as firms lack the financial incentive to reduce their carbon emissions.
Carbon markets, where the right to pollute is bought and sold, can address this issue by charging firms for emitting carbon, thus helping to reduce emissions.
The combination of standardized accounting practices and technological advancements has enhanced companies' ability to track and report their carbon emissions.
While this remains a challenge for many small businesses, especially in developing countries where tracking supply chain emissions is difficult, innovations like real-time data tracking in the energy sector are improving the accuracy and depth of corporate carbon accounting.
Nonetheless, many corporations prefer voluntary reporting mechanisms, such as the Carbon Disclosure Project.
They are generally opposed to government-imposed carbon emission limits, fearing that such regulations could lead to production restrictions or higher costs.
Additionally, companies argue that the variability in production processes and supply chains makes it hard to establish an optimal carbon budget for each facility.
Large multinational companies, including ExxonMobil and General Motors, support carbon markets where carbon credits can be freely traded, with prices set by market dynamics.
They believe this approach would allow for more efficient allocation of carbon credits than government mandates

4. Challenges

Even when a carbon market is in place, governments that are not focused on reducing emissions may increase the number of carbon credits available, which can lower the cost of emissions and result in no significant reduction in pollution.
Alternatively, some governments may impose a strict cap on the supply of carbon credits but allow companies to bypass the system by illegally emitting carbon.
The effectiveness of carbon offsets also depends on how motivated business owners are to address carbon emissions, which is often minimal.
Critics argue that companies buying carbon offsets may do so more for image purposes than out of a genuine commitment to reducing emissions, and may not ensure that their investments are effectively offsetting carbon emissions.
Furthermore, some critics question how a government could determine the optimal supply of carbon credits.
They contend that politicians, who do not face direct economic consequences for their emission reduction policies, may restrict the number of credits too much, potentially hindering economic growth

For Prelims: Carbon farming, COP21, Paris Agreement, carbon cycle

For Mains:

1. What is Carbon farming? discuss the effective techniques within carbon farming for reducing greenhouse gas emissions, and explain the challenges that exist in implementing them, particularly in developing countries like India. (250 Words)

Previous Year Questions

1. With reference to carbon nanotubes, consider the following statements (UPSC 2020)

1. They can be used as carriers of drugs and antigens in the human body.

2. They can be made into artificial blood capillaries for an injured part of the human body.

3. They can be used in biochemical sensors.

4. Carbon nanotubes are biodegradable.

Which of the statements given above are correct?

A. 1 and 2 only B. 2, 3 and 4 only C. 1, 3 and 4 only D. 1, 2, 3 and 4

2. With reference to the recent developments in science, which one of the following statements is not correct? (UPSC 2019)

A. Functional chromosomes can be created by joining segments of DNA taken from cells of different species.

B. Pieces of artificial functional DNA can be created in laboratories.

C. A piece of DNA taken out from an animal cell can be made to replicate outside a living cell in a laboratory.

D. Cells taken out from plants and animals can be made to undergo cell division in laboratory petri dishes

3. Consider the following statements (upsc 2016)

1. The Sustainable Development Goals were first proposed in 1972 by a global think tank called the 'Club of Rome

2. Sustainable Development goals has to be achieved by the year 2030

Which of the statements given above is/ are correct

A. 1 Only B. 2 Only C. Both 1 and 2 D. Neither 1 Nor 2

4. LPG stands for (MPSC 2017)

A. Liquidity, Profitability and Growth

B. Liberalisation, Privatisation and Growth

C. Liberalisation, Privatisation and Globalisation

D.None of the above

5. Pradhan Mantri Ujjwala Yojana was launched (RRC Group D 2018)

A. July 2017 B. January 2018 C. May 2014 D. May 2016

6. In the context of WHO Air Quality Guidelines, consider the following statements: (UPSC 2022)

1. The 24-hour mean of PM2.5 should not exceed 15 μg/m³ and annual mean of PM2.5 should not exceed 5 μg/m³.

2. In a year, the highest levels of ozone pollution occur during the periods of inclement weather.

3. PM10 can penetrate the lung barrier and enter the bloodstream.

4. Excessive ozone in the air can trigger asthma.

Which of the statements given above are correct?

A. 1, 3 and 4 B. 1 and 4 only C. 2, 3 and 4 D. 1 and 2 only

Answers: 1-C, 2-A, 3-B, 4-C, 5-D, 6-B

Source: The Hindu

FOREIGN EXCHANGE RESERVES

1. Context

Concerned about the falling value of the rupee amid the rise in oil prices and fears over inflation in the wake of the West Asia conflict, the Reserve Bank of India last week instructed banks to limit their net open exposure to the currency in the foreign exchange market to $100 million by the end of each day. Authorised dealers must comply with this rule by April 10.

2. What are foreign exchange reserves?

Foreign exchange reserves are the stock of foreign money and other external assets kept by a country’s central bank, in India’s case the Reserve Bank of India (RBI). You can think of it as the country’s financial emergency fund in foreign currencies.
Imagine India as a large household. Just as a family keeps savings in the bank for emergencies, the country keeps a reserve of foreign assets so that it can meet international payments whenever required.
Since India imports many essential goods—especially crude oil, electronics, machinery, and gold—it has to pay other countries mostly in US dollars or other international currencies. This is where foreign exchange reserves become extremely important.
These reserves are mainly held in the form of US dollars, euros, pounds, yen, gold, and assets such as US government bonds and treasury bills. They may also include Special Drawing Rights (SDRs) and the reserve position with the IMF.
To understand it more clearly, suppose India wants to import crude oil from another country. The payment cannot usually be made in Indian rupees because international trade is largely settled in dollars. The RBI uses the country’s foreign exchange reserves to ensure that sufficient dollars are available in the system for such payments.
Foreign exchange reserves also play a major role in protecting the value of the rupee. For example, if the rupee starts falling sharply against the dollar, the RBI may sell dollars from its reserves in the market and buy rupees.
This increases the supply of dollars and helps stabilize the exchange rate. Recently, the RBI has used reserves to reduce volatility in the rupee during global tensions and oil price shocks.
In simple terms, foreign exchange reserves act as the country’s economic shield and confidence booster. They help India continue imports during crises, repay external debt, stabilize the currency, and reassure investors that the country is financially strong

3. What is the foreign exchange reserves of India in 2026?

The central bank introduced this ceiling at a time when the Indian rupee had slipped to a historic low of 94.81 against the US dollar, marking a depreciation of nearly 4 percent since the conflict began in late February.
This measure was primarily intended to arrest the rupee’s slide by restricting the extent of foreign currency exposure that banks are allowed to hold within the domestic market.
Moreover, as pressure on the domestic currency intensified, the Reserve Bank of India deployed dollars from its foreign exchange reserves to support the rupee and contain excessive volatility.
Consequently, India’s forex reserves have declined by more than $30 billion, falling to around $698.34 billion since the onset of the conflict. This move reflects the central bank’s growing concern over exchange-rate instability and its efforts to prevent sharp and disorderly fluctuations in the currency market.
Large-scale outflows by foreign investors have further intensified downward pressure on the rupee, causing it to breach the ?92, ?93, and now ?94 per dollar levels within the same month.
The currency had already weakened beyond the ?90 and ?91 marks in December 2025, and it is now hovering dangerously close to the ?95 per dollar threshold, underscoring the severity of the ongoing external and financial pressures

4. What are the components of the foreign reserves of India?

The largest component is Foreign Currency Assets (FCA). This forms the bulk of India’s reserves—usually around 80–85 percent. It includes assets held in major international currencies such as US dollars, euros, pounds, and yen.
These are not just bundles of cash; most of them are invested in safe foreign assets such as US Treasury bonds, sovereign securities, deposits with foreign central banks, and commercial banks. This is the main pool the RBI uses when it wants to stabilize the rupee in the forex market.
The second component is gold reserves. India holds a significant quantity of gold as part of its reserves. Gold acts as a store of value and a hedge during times of global uncertainty, inflation, or geopolitical tensions. Unlike paper currencies, gold retains intrinsic value and strengthens confidence in the country’s reserve position
The third component is Special Drawing Rights (SDRs). These are international reserve assets created by the International Monetary Fund.
SDRs are not a currency in themselves, but they can be exchanged for freely usable currencies like the US dollar. They act as an additional source of international liquidity for member countries.
The fourth component is the Reserve Tranche Position (RTP) in the IMF. This refers to the amount India can immediately withdraw from the IMF without any conditions, based on its quota contribution to the Fund. It is like India’s readily available claim with the IMF

5. RBI Proposed Changes

Bankers are showing growing concern over the proposed regulatory changes, as these measures could have immediate operational and financial implications. A key issue being raised is the pace of implementation.
Several banks have requested the Reserve Bank of India to provide a transition period of nearly three months so that existing foreign exchange positions can be gradually reduced or restructured in an orderly manner.
According to market analysts tracking the developments, sudden enforcement would leave limited scope for effective risk management and could result in avoidable losses.
The magnitude of existing exposure has further heightened these concerns. Estimates suggest that individual banks currently hold significant dollar positions, making the cumulative exposure across the banking system quite large.
If the revised limits are introduced without any transition period, banks may be forced to unwind these positions quickly, potentially leading to dollar sales worth nearly $11–15 billion across the sector, according to market assessments.
Such rapid unwinding could also expose banks to mark-to-market losses, particularly if positions have to be exited at unfavourable exchange rates.
These losses would be reflected in their treasury books for the ongoing March quarter, thereby exerting pressure on profitability and quarterly earnings.
Market observers also note that if the rupee continues to weaken, the RBI may introduce additional measures to support the currency and preserve foreign exchange reserves.
A similar approach was witnessed during the global financial crisis and the taper tantrum, when then RBI Governor Raghuram Rajan responded to pressure on the rupee by encouraging foreign currency inflows.
One notable intervention was the FCNR(B) scheme, which offered subsidized swap rates and successfully attracted more than $30 billion, significantly strengthening India’s forex reserves

6. Way Forward

Market analysts suggest that if the rupee’s depreciation persists, the Reserve Bank of India may introduce additional policy measures to support the currency and protect foreign exchange reserves. A similar approach was seen during earlier episodes of financial stress. During the global financial crisis and the subsequent taper tantrum, when the rupee came under significant pressure, then RBI Governor Raghuram Rajan responded by encouraging foreign currency inflows into the country. One of the most notable interventions was the FCNR(B) scheme, which offered concessional swap rates and succeeded in attracting more than $30 billion, thereby substantially strengthening India’s foreign exchange reserves

For Prelims: Current events of national and international importance

For Mains: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Previous Year Questions

1.Which of the following has/have occurred in India after its liberalization of economic policies in 1991? (UPSC CSE, 2017)
1. Share of agriculture in GDP increased enormously.
2. Share of India’s exports in world trade increased.
3. FDI inflows increased.
4. India’s foreign exchange reserves increased enormously.
Select the correct answer using the codes given below:
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

Answer (b)

2. With reference to the Indian economy, consider the following statements: (UPSC CSE, 2022)
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer (b)

Source: The Hindu

FOREIGN EXCHANGE RESERVES

1. Context

2. What are foreign exchange reserves?

Foreign exchange reserves are the stock of foreign money and other external assets kept by a country’s central bank, in India’s case the Reserve Bank of India (RBI). You can think of it as the country’s financial emergency fund in foreign currencies.
Imagine India as a large household. Just as a family keeps savings in the bank for emergencies, the country keeps a reserve of foreign assets so that it can meet international payments whenever required.
Since India imports many essential goods—especially crude oil, electronics, machinery, and gold—it has to pay other countries mostly in US dollars or other international currencies. This is where foreign exchange reserves become extremely important.
These reserves are mainly held in the form of US dollars, euros, pounds, yen, gold, and assets such as US government bonds and treasury bills. They may also include Special Drawing Rights (SDRs) and the reserve position with the IMF.
To understand it more clearly, suppose India wants to import crude oil from another country. The payment cannot usually be made in Indian rupees because international trade is largely settled in dollars. The RBI uses the country’s foreign exchange reserves to ensure that sufficient dollars are available in the system for such payments.
Foreign exchange reserves also play a major role in protecting the value of the rupee. For example, if the rupee starts falling sharply against the dollar, the RBI may sell dollars from its reserves in the market and buy rupees.
This increases the supply of dollars and helps stabilize the exchange rate. Recently, the RBI has used reserves to reduce volatility in the rupee during global tensions and oil price shocks.
In simple terms, foreign exchange reserves act as the country’s economic shield and confidence booster. They help India continue imports during crises, repay external debt, stabilize the currency, and reassure investors that the country is financially strong

3. What is the foreign exchange reserves of India in 2026?

The central bank introduced this ceiling at a time when the Indian rupee had slipped to a historic low of 94.81 against the US dollar, marking a depreciation of nearly 4 percent since the conflict began in late February.
This measure was primarily intended to arrest the rupee’s slide by restricting the extent of foreign currency exposure that banks are allowed to hold within the domestic market.
Moreover, as pressure on the domestic currency intensified, the Reserve Bank of India deployed dollars from its foreign exchange reserves to support the rupee and contain excessive volatility.
Consequently, India’s forex reserves have declined by more than $30 billion, falling to around $698.34 billion since the onset of the conflict. This move reflects the central bank’s growing concern over exchange-rate instability and its efforts to prevent sharp and disorderly fluctuations in the currency market.
Large-scale outflows by foreign investors have further intensified downward pressure on the rupee, causing it to breach the ?92, ?93, and now ?94 per dollar levels within the same month.
The currency had already weakened beyond the ?90 and ?91 marks in December 2025, and it is now hovering dangerously close to the ?95 per dollar threshold, underscoring the severity of the ongoing external and financial pressures

4. What are the components of the foreign reserves of India?

The largest component is Foreign Currency Assets (FCA). This forms the bulk of India’s reserves—usually around 80–85 percent. It includes assets held in major international currencies such as US dollars, euros, pounds, and yen.
These are not just bundles of cash; most of them are invested in safe foreign assets such as US Treasury bonds, sovereign securities, deposits with foreign central banks, and commercial banks. This is the main pool the RBI uses when it wants to stabilize the rupee in the forex market.
The second component is gold reserves. India holds a significant quantity of gold as part of its reserves. Gold acts as a store of value and a hedge during times of global uncertainty, inflation, or geopolitical tensions. Unlike paper currencies, gold retains intrinsic value and strengthens confidence in the country’s reserve position
The third component is Special Drawing Rights (SDRs). These are international reserve assets created by the International Monetary Fund.
SDRs are not a currency in themselves, but they can be exchanged for freely usable currencies like the US dollar. They act as an additional source of international liquidity for member countries.
The fourth component is the Reserve Tranche Position (RTP) in the IMF. This refers to the amount India can immediately withdraw from the IMF without any conditions, based on its quota contribution to the Fund. It is like India’s readily available claim with the IMF

5. RBI Proposed Changes

Bankers are showing growing concern over the proposed regulatory changes, as these measures could have immediate operational and financial implications. A key issue being raised is the pace of implementation.
Several banks have requested the Reserve Bank of India to provide a transition period of nearly three months so that existing foreign exchange positions can be gradually reduced or restructured in an orderly manner.
According to market analysts tracking the developments, sudden enforcement would leave limited scope for effective risk management and could result in avoidable losses.
The magnitude of existing exposure has further heightened these concerns. Estimates suggest that individual banks currently hold significant dollar positions, making the cumulative exposure across the banking system quite large.
If the revised limits are introduced without any transition period, banks may be forced to unwind these positions quickly, potentially leading to dollar sales worth nearly $11–15 billion across the sector, according to market assessments.
Such rapid unwinding could also expose banks to mark-to-market losses, particularly if positions have to be exited at unfavourable exchange rates.
These losses would be reflected in their treasury books for the ongoing March quarter, thereby exerting pressure on profitability and quarterly earnings.
Market observers also note that if the rupee continues to weaken, the RBI may introduce additional measures to support the currency and preserve foreign exchange reserves.
A similar approach was witnessed during the global financial crisis and the taper tantrum, when then RBI Governor Raghuram Rajan responded to pressure on the rupee by encouraging foreign currency inflows.
One notable intervention was the FCNR(B) scheme, which offered subsidized swap rates and successfully attracted more than $30 billion, significantly strengthening India’s forex reserves

6. Way Forward

For Prelims: Current events of national and international importance

For Mains: General Studies III: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Current Affair

HEATWAVE

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2. What is a Heat Wave?

3. How do Heat waves Occur?

4. Impacts of heat waves in India

5. How does air mass contribute to heat waves?

6. Way ahead for Heat waves

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CASTE CENSUS

CARBON MARKET

FOREIGN EXCHANGE RESERVES

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