{"id":2853,"date":"2026-01-30T10:29:08","date_gmt":"2026-01-30T10:29:08","guid":{"rendered":"https:\/\/iasquest.com\/?p=2853"},"modified":"2026-01-30T10:29:08","modified_gmt":"2026-01-30T10:29:08","slug":"india-eu-free-trade-agreement-the-solution-to-the-falling-rupee","status":"publish","type":"post","link":"https:\/\/kingmakersiasacademy.com\/current-affairs\/india-eu-free-trade-agreement-the-solution-to-the-falling-rupee\/","title":{"rendered":"India\u2013EU Free Trade Agreement &amp; The solution to the falling rupee"},"content":{"rendered":"\n<h2 class=\"wp-block-heading has-text-color has-link-color has-medium-font-size wp-elements-1\" style=\"color:#ff0000\"><strong>1. \u201cThe recently concluded India\u2013EU Free Trade Agreement marks a strategic shift in India\u2019s global trade engagement.\u201d Discuss its economic significance, strategic implications, and challenges in implementation.<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-black-color has-text-color has-background has-link-color\" style=\"background-color:#a6e5ce\"><tbody><tr><td><strong>Syllabus:<\/strong> <br><strong>General Studies \u2013 II: Bilateral, regional and global groupings and agreements involving India and\/or affecting India\u2019s interests<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-2 wp-block-paragraph\"><strong>IN NEWS:<\/strong> \u2018India\u2013EU Free Trade Agreement Concluded: A Strategic Breakthrough in India\u2019s Global Trade Engagement. Mother of all deals\u2019: India and the EU finalise FTA<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-3 wp-block-paragraph\">The conclusion of the <strong>India\u2013European Union Free Trade Agreement (FTA) in January 2026<\/strong> marks India\u2019s <strong>largest and most comprehensive trade pact<\/strong>, covering two economies that together account for <strong>around 25% of global GDP and nearly one-third of global trade<\/strong>. Beyond tariff reductions, the agreement reflects a <strong>strategic shift in India\u2019s global trade engagement<\/strong>, combining economic integration with geopolitical and supply-chain considerations.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-4 wp-block-paragraph\"><strong>Economic Significance<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-5 wp-block-paragraph\"><strong>1. Unprecedented market access for Indian exports<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color has-link-color wp-block-list wp-elements-6\">\n<li>The EU will eliminate tariffs on <strong>99.5% of Indian exports by trade value<\/strong>, with <strong>over 90% entering duty-free from day one<\/strong>.<\/li>\n\n\n\n<li>Labour-intensive exports worth <strong>USD 33 billion<\/strong> including textiles, apparel, leather, marine products, gems and jewellery will gain immediate competitiveness, supporting <strong>employment generation, MSMEs, women and artisans<\/strong>.<\/li>\n<\/ul>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-7 wp-block-paragraph\"><strong>2. Boost to services trade and mobility<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color has-link-color wp-block-list wp-elements-8\">\n<li>The EU has made commitments across <strong>144 services sub-sectors<\/strong>, including IT\/ITeS, professional services, education and financial services.<\/li>\n\n\n\n<li>A <strong>future-ready mobility framework<\/strong> enables movement of intra-corporate transferees, contractual service suppliers and independent professionals, strengthening India\u2019s services exports (already <strong>USD 83 billion in 2024<\/strong>).<\/li>\n<\/ul>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-9 wp-block-paragraph\"><strong>3. Integration into Global Value Chains (GVCs)<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-10 wp-block-paragraph\">Reduced tariffs on EU machinery, electronics and medical devices will <strong>lower input costs<\/strong>, enhance productivity and reinforce the <strong>Make in India<\/strong> initiative.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-11 wp-block-paragraph\"><strong>Strategic Implications<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-12 wp-block-paragraph\"><strong>1. Diversification of trade partnerships<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-13 wp-block-paragraph\">The FTA reduces India\u2019s vulnerability to <strong>protectionist measures and tariff weaponisation<\/strong>, particularly amid uncertainty in U.S. trade policy.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-14 wp-block-paragraph\"><strong>2. Strengthening rules-based trade order<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-15 wp-block-paragraph\">The agreement signals a joint commitment to <strong>open, predictable and rules-based trade<\/strong>, at a time of global economic fragmentation.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-16 wp-block-paragraph\"><strong>3. Addressing emerging global issues<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-17 wp-block-paragraph\">Provisions on <strong>Carbon Border Adjustment Mechanism (CBAM)<\/strong> ensure technical cooperation, MFN-based flexibilities and financial support, safeguarding India\u2019s export interests.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-18 wp-block-paragraph\"><strong>4. Geopolitical alignment<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-19 wp-block-paragraph\">Along with FTAs with the UK and EFTA, the deal effectively opens the <strong>entire European market<\/strong>, positioning India as a <strong>trusted economic and strategic partner<\/strong>.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-20 wp-block-paragraph\"><strong>Challenges in Implementation<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color has-link-color wp-block-list wp-elements-21\">\n<li><strong>Non-tariff barriers<\/strong> such as SPS norms and technical standards may continue to restrict market access.<\/li>\n\n\n\n<li><strong>Adjustment pressures<\/strong> on sensitive sectors, particularly automobiles and high-end manufacturing.<\/li>\n\n\n\n<li><strong>CBAM compliance costs<\/strong> for carbon-intensive exports.<\/li>\n\n\n\n<li>Limited awareness, compliance capacity and scale of <strong>MSMEs<\/strong> to fully utilise FTA benefits.<\/li>\n<\/ul>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-22 wp-block-paragraph\">The India\u2013EU FTA represents a <strong>paradigm shift from transactional trade to strategic economic partnership<\/strong>, aligned with India\u2019s vision of <em>Viksit Bharat 2047<\/em>. Effective implementation, regulatory preparedness and domestic competitiveness will be critical to translating its vast potential into sustained and inclusive growth.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-black-color has-text-color has-background has-link-color\" style=\"background-color:#96e5c5\"><tbody><tr><td><strong>PYQ REFERENCE<\/strong> <br>Q. Evaluate the economic and strategic dimensions of India\u2019s Look East Policy in the context of the post Cold War international scenario. (2016)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"has-text-color has-link-color wp-elements-23 wp-block-paragraph\" style=\"color:#0400fe\"><strong>Source:<\/strong><a href=\"https:\/\/www.thehindu.com\/business\/Economy\/india-and-eu-conclude-talks-on-mother-of-all-deals-ending-negotiations-that-started-in-2007\/article70556539.ece\" target=\"_blank\" rel=\"noopener\"><strong>https:\/\/www.thehindu.com\/business\/Economy\/india-and-eu-conclude-talks-on-mother-of-all-deals-ending-negotiations-that-started-in-2007\/article70556539.ece<\/strong><\/a><\/p>\n\n\n\n<p class=\"has-text-color has-link-color wp-elements-24 wp-block-paragraph\" style=\"color:#3c00ff\"><a href=\"https:\/\/www.pib.gov.in\/PressReleasePage.aspx?PRID=2219065&amp;reg=3&amp;lang=1\" target=\"_blank\" rel=\"noopener\"><strong>https:\/\/www.pib.gov.in\/PressReleasePage.aspx?PRID=2219065&amp;reg=3&amp;lang=1<\/strong><\/a><\/p>\n\n\n\n<p class=\"has-text-color has-link-color wp-elements-25 wp-block-paragraph\" style=\"color:#ff0000\"><strong>2. The recent depreciation of the Indian rupee is driven more by geopolitical factors than by economic fundamentals. Analyse the causes of the rupee\u2019s fall and suggest suitable policy responses to address the situation.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-black-color has-text-color has-background has-link-color\" style=\"background-color:#e3dd9a8f\"><tbody><tr><td><strong>Syllabus:<\/strong> <br><strong>General Studies \u2013 III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-26 wp-block-paragraph\"><strong>IN NEWS:<\/strong> The solution to the falling rupee lies in diplomacy<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-27 wp-block-paragraph\">The recent depreciation of the Indian rupee has occurred <strong>despite robust macroeconomic fundamentals<\/strong>, indicating that <strong>geopolitical developments rather than economic weaknesses<\/strong> are driving currency movements. This marks a shift from conventional exchange-rate dynamics in emerging economies.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-28 wp-block-paragraph\"><strong>Causes of the Rupee\u2019s Fall:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-29 wp-block-paragraph\"><strong>1. Geopolitically driven capital outflows (primary factor):<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color has-link-color wp-block-list wp-elements-30\">\n<li>Net capital flows turned <strong>negative at $3.9 billion during April\u2013December 2025<\/strong>, compared to <strong>+$10.6 billion in the same period of 2024<\/strong>.<\/li>\n\n\n\n<li>This reversal followed the <strong>imposition of cumulative 50% tariffs by the U.S. on Indian exports<\/strong>, reflecting the growing weaponisation of trade policy.<\/li>\n<\/ul>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-31 wp-block-paragraph\"><strong>2. Investor risk aversion and confidence shock:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-32 wp-block-paragraph\">Although India\u2019s <strong>GDP growth is estimated at 7.4%<\/strong> and <strong>CPI inflation stood at 1.33% (end-2025)<\/strong> well below the RBI\u2019s target band foreign portfolio investors exited due to <strong>policy uncertainty<\/strong>, not weak fundamentals.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-33 wp-block-paragraph\"><strong>3. Limited role of external imbalance:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-34 wp-block-paragraph\">India\u2019s <strong>current account deficit was only 0.76% of GDP in H1 2025-26<\/strong>, significantly lower than <strong>1.35% in the previous year<\/strong>, ruling out balance-of-payments stress as the trigger.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-35 wp-block-paragraph\"><strong>4. Self-reinforcing depreciation cycle:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-36 wp-block-paragraph\">A ~<strong>6% fall in the rupee since April 2025<\/strong> increased hedging costs and expectations of further depreciation, accelerating equity market sell-offs and capital flight.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-37 wp-block-paragraph\"><strong>Devaluation Is Not an Effective Remedy<\/strong><\/p>\n\n\n\n<ul class=\"has-black-color has-text-color has-link-color wp-block-list wp-elements-38\">\n<li><strong>High import dependence:<\/strong> Crude oil alone accounts for <strong>~25% of merchandise imports<\/strong>, making depreciation inflationary.<\/li>\n\n\n\n<li><strong>Rising import content of exports<\/strong> limits export competitiveness gains.<\/li>\n\n\n\n<li><strong>REER misalignment absent:<\/strong> India\u2019s inflation is lower than that of many advanced economies, reducing the justification for currency weakening.<\/li>\n<\/ul>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-39 wp-block-paragraph\"><strong>Policy Responses and Way Forward<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-40 wp-block-paragraph\"><strong>1. Economic diplomacy:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-41 wp-block-paragraph\">Resolving trade tensions with the U.S. is critical; easing tariff uncertainty can <strong>reverse capital outflows and stabilise the rupee<\/strong>, as seen in post-trade deal currency recoveries globally.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-42 wp-block-paragraph\"><strong>2. RBI\u2019s calibrated intervention:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-43 wp-block-paragraph\">With forex reserves exceeding <strong>$600 billion<\/strong>, the RBI can <strong>smooth volatility without targeting a fixed exchange rate<\/strong>.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-44 wp-block-paragraph\"><strong>3. Communication and confidence building:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-45 wp-block-paragraph\">Clear RBI guidance on managing disorderly movements can anchor expectations and curb speculative pressures.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-46 wp-block-paragraph\"><strong>4. Structural resilience:<\/strong><\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-47 wp-block-paragraph\">Promoting <strong>stable FDI inflows<\/strong>, deepening bond markets, and reducing reliance on volatile portfolio flows can strengthen external stability.<\/p>\n\n\n\n<p class=\"has-black-color has-text-color has-link-color wp-elements-48 wp-block-paragraph\">When currency depreciation is driven by <strong>geopolitical uncertainty rather than macroeconomic stress<\/strong>, <strong>diplomacy, confidence management, and calibrated intervention, not devaluation constitute the most effective policy response<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#e3dd9a8f\"><tbody><tr><td><strong>PYQ REFERENCE<\/strong> <br>Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (2018)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"has-text-color has-link-color wp-elements-49 wp-block-paragraph\" style=\"color:#0004fe\"><strong>Source:<\/strong><a href=\"https:\/\/www.thehindu.com\/opinion\/lead\/the-solution-to-the-falling-rupee-lies-in-diplomacy\/article70556822.ece\" target=\"_blank\" rel=\"noopener\"><strong>https:\/\/www.thehindu.com\/opinion\/lead\/the-solution-to-the-falling-rupee-lies-in-diplomacy\/article70556822.ece<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>\u201cThe recently concluded India\u2013EU Free Trade Agreement marks a strategic shift in India\u2019s global trade engagement.\u201d Discuss its economic 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