Seats Which BJP May Contest In TN Elections 2026 - Granular Electoral Analysis of 26 Vidhan Sabha Constituencies

Source - The Frontline Magazine

Introduction -

The Tamil Nadu assembly elections are around the corner. This elections is also quite special for the state, as it would be the first election which wont be fought in the shadow of 3 towering politicians, namely, Captain Vijaykanth, M. Karunanidhi & J. Jayalalithaa who dominated the state politics discourse for around 2 decades. This election is also unique which is also conducted on the backdrop for the first time since the death of M. Karunanidhi where DMK is the current incumbent. Furthermore, this election is also critical, as its after almost 16 years, that a mass cinema actor has transitioned into full time politics, this is none other than Thalapathy Vijay who is contesting elections with his newly formed Tamilaga Vetri Kalagam party.

This election is also being fuelled by the alliance talks of both UPA & NDA. Since, TVK of Mr. Jospeh Vijay is not in any alliance as of now, hence this article does not discuss 

UPA currently has - DMK as the prinicipal party with Congress, VCK (an outfit meant for the political upliftment of Dalits) of Mr. Thol Thirmaluvan, Indian Union Muslim League, Mukkalathor Pulipadai (an outfit meant for the political interests of  Thevar OBC caste) of Mr. Karunas, Left parties (both CPI & CPM), All India Forward Bloc, Adhi Tamilar Perivai (an outfit meant for the political upliftment of Dalits), DMDK of late actor Captain Vijaykanth who joined the alliance barely a few days ago, KMDK (an outfit concentrated in Kongu region of Tamil Nadu), MNM of actor Kamal Hasan, MDMK of Mr. Vaiyapuri Gopalasamy (called Vaiko), SDPI(political front of banned terrorist organisation PFI), splinter group of PMK led by Ramadoss Sr. & a few other small political outfits. The total number of parties in this entire alliance is close to a total of 21 parties. The seat sharing talks is so far not concluded as the deadlock between the DMK & Congress continues as of the time of writing this article.

On the other hand, the NDA has multiple parties, which includes - ADMK led by Edapaddi K. Palanisamy, Bharatiya Janata Party (BJP), AMMK (of VK Sasikala's nephew TTV Dhinakaran), IJK of  TR Paarivendar, PMK of Dr. Anbumani Ramadoss, PDK of Muthaih, PTMK of NR Dhanapalan, PBK of M. Jagan Moorthy, PNK of AC Shanamugham, South Indian Forward Bloc of KC Thimuran, TMMK of John Pandian, Tamil Manila Congress of GK Vasan, UUK and the possibility of PT by Dr. K. Krishnaswamy slated to join the alliance. Even the NDA alliance is close to a total of 14 parties. The NDA alliance in 2021, had all these parties sans AMMK & some caste leaders. As per news reports, PMK has already been allocated 16 seats by ADMK in the alliance as of now.

Lok Sabha Elections & BJP -

Now, the interesting part is that in the 2024 elections, the BJP which was led by then state president & former IPS officer, K. Annamalai had contested the election effectively as a third front as a NDA alliance. BJP had contested around 25 seats on its own symbol, with 10 seats which were given to PMK, 3 seats were allocated to Tamil Manila Congress & 1 seat was allocated to AMMK of TTV Dhinakaran. The other parties in the current NDA, were all contesting on BJPs symbol, which made the contest really interesting. Leaders like TR Paarivendhar, John Pandian, AC Shanamugham & T. Devanathan Yadav, had contested the elections on BJP symbol. In this election, the second Dravidian major, ADMK had an alliance with DMDK, PT & a few caste based leaders. 

BJP posted interesting but mixed results in the Lok Sabha elections of 2024, while it managed to come second in around a dozen constituencies,but the vote share of BJP remained at around 12% which was the highest ever the state unit has ever polled in the party history. Coupled, with the election  & now, with the latest data of ECI, which has pointed out BJP to be the third largest party in TN at booth level, has prompted tall state BJP leaders like Nainar Nagendran (current state BJP chief) to demand upto 50 seats in its alliance with ADMK.

This article has taken into account, a few lok sabha seats where the BJP managed to save its deposit/finish second & around 70 vidhan sabha segments, where BJP managed to poll good number of votes & using basic data analysis, will try to possibly point out the seats which BJP may end up contesting in the ongoing seat sharing negotiations within the NDA. BJP had failed to lead in even a single vidhan sabha constituency in LS 2024, which was a reason for them to get into an alliance with ADMK again.

Seat by seat analysis (Lok Sabha level) 

1. Tiruvallur - This lok sabha seat is located in the northernmost part of Tamil Nadu. The current MP from this seat was from the Congress party, who won  with a margin of almost 5.72 lakh votes. The BJP candidate here was Mr. Pon. V. Balaganapathy who finised second with a 15% vote share, pushing ADMK led alliance which had DMDK as its ally to the third position. This seat had 3 vidhan sabha segments where the BJP managed to poll more number of votes than that of DMDK. 

The seat of Ponnamalle has a current MLA from the DMK party. BJP polled around 38k votes in this assembly segment, while DMDK (part of ADMK alliance) polled around 37.5k votes, as per form B data. The NDA candidate in 2021 belonged to the PMK party who polled around 55k votes, BJP has never contested this seat in its history in Tamil Nadu. While the cumulative alliance did perform well, there are high chances that this seat, may again be given to PMK, as it falls in Northern Tamil Nadu which is considered to be a stronghold of PMK due to the backing of the influential Vanniyar OBC community. Additionally, given that BJP has never contested in this seat, hence the probability of BJP getting this seat allocated to them seems very low.

The second seat, where the BJP candidate was able to poll good number of votes was in Avadi vidhan sabha constituency. It polled 51k votes in this segment while DMDK(part of ADMK alliance) polled around 34,337 votes. The NDA candidate in 2021, belonged to the ADMK, who polled around 95 k votes. BJP has never contested in this seat in its history of TN, hence there are chances that ADMK may field its own candidate here.

The third seat, where BJP polled good votes was in Madavaram. BJP polled 43,990 votes while DMDK(part of ADMK alliance) polled around 40,000 votes in this segment. The NDA candidate in 2021 belonged to ADMK, who polled around 91k votes. BJP has never contested this seat in its history in TN, hence there are high chances that ADMK may field its own candidate here.

2. Chennai city - Chennai city has 3 lok sabha seats located in its vicinity. These 3 seats are namely - Chennai North, Chennai Central & Chennai South. All these 3 seats were contested by BJP in the vidhan sabha election. BJP finished third in Chennai North & finished second in Chennai Central, Chennai South seat.

A. Chennai North seat was contested by RC Paul Kanagaraj, who polled around 12.5%. The party of ADMK led alliance which contested in this seat was ADMK itself. BJP ended up finishing third in this constituency. 

BJP had respectable polling figures, only in 1 seat of this vidhan sabha segment, which was Kolathur, where it polled around 25k votes, while ADMK polled 18k votes. The last election was contested by ADMK candidate who polled around 44k votes. This vidhan sabha segment is represented by the Tamil Nadu CM, MK Stalin, hence, it is very less likely that ADMK may like to allocate this seat to BJP as it can give DMK the opportunity to its erstwhile ally in poor light. Hence, BJP contesting Kolathur seat is a bit low, even though the BJP leadership may be keen to contest this seat. Additionally, BJP has never contested this seat, which also makes it against them. However, the NDA alliance may want to field a star candidate in this seat. 

B. Chennai Central seat was contested by state BJYM chief, Vinoj Selvam. The other party in contest on this seat was DMDK who was contesting on behalf of ADMK alliance. BJP polled 23% votes on this seat, which is a massive deal as this seat has constantly elected tall leaders of the DMKs first family like- M. Karunanidhi, Udhayanidhi Stalin, Murasoli Maran & Dayanidhi Maran in the past. BJP polled good votes in all the 6 assembly segments and was comfortably ahead of ADMK+ alliance.

In Thousand Lights, BJP polled around 31k votes, while DMDK polled only 12k votes. Current MLA here is from DMK party. In the 2021 election, this seat was contested by Khushboo Sundar, who is currently a BJP leader in TN. She had polled around 39,000 votes in this seat. In total, the cumulative NDA performance in this seat projected a rise of 4,000 votes. BJP has contested this seat, in 1996, 2001, 2016 & 2021, which makes BJPs claim to this seat strong enough in the NDA alliance.

The other seat of Chennai Central, where BJP did perform well surprisingly was in Harbour. BJP polled around  27,000 votes which was way ahead of the 5,000 odd votes polled by DMDK here. In 2021 election, this seat was contested by Vinoj Selvam of BJP. He had polled around 32,000 votes, cumulatively the performance of NDA on this seat has been the same. Given, BJP has contested this seat in 1989,1996,2006,2011, 2016 & 2021, it is high possibility that ADMK may like to allocate this seat to BJP.

Anna Nagar is another seat of Chennai Central lok sabha seat, where the BJP performed well in the recently concluded Lok Sabha elections. BJP polled 33,000 votes which was way ahead of 19,000 odd votes which were polled by the DMDK. In 2021, this seat was contested by S. Gokula Indira of ADMK, who roughly polled around 52,000 votes. BJP has contested this seat in the past elections of 1991,1996, 2006 & 2016. Given, the politically vibrant history of this seat, which elected DMK patriarch, M. Karunanidhi back in 1967, BJP would like to ideally push for this seat. There are high chances, that BJP may end up contesting this seat.

Chepauk seat is the most critical seat of Chennai Central lok sabha constituency, today. Chepauk is the sitting MLA seat of current DCM, Udhayanidhi Stalin. BJP polled around 24,000 votes which was way ahead of 9,000 odd votes by DMDK. In 2021, this seat was contested by Kasaali of PMK, who polled only around 23,000 votes. Given, in the last election itself, ADMK conceeded this seat to PMK, there are high chances that, ADMK would like to conceede this seat to some NDA ally. Given, the nature of this seat which is a hardcore DMK stronghold seat, BJP may like to contest this seat, seeing that, the cumulative votes of current NDA setup increased by around 10,000 in lok sabha elections. BJP has contested this seat twice sans alliance, in 2011 & 2016, which strengthens their claim. NDA alliance, may like to field, some tall leader in this seat like, K. Annamalai who may poll good number of votes here in the battle of young turks.

Egmore seat is another seat, which has a high proportion of voters. The sitting MLA is from DMK party. BJP polled around 24,000 votes in this particular seat, which was again way ahead of DMDKs 11,000 odd votes. In 2021, this seat was contested was John Pandian, current TMMK chief on ADMK symbol. He polled around 30,000 votes in that election. There was a marginal rise of around 4,000 votes on this seat. BJP has contested here in 1996,2006, 2011 & 2016 from this seat. BJP which contested in 2016 on its own strength, had polled arund 7000 votes in this segment.

This is one of the seats, which ADMK has never won in its history, hence, it would have no problems in allocating this seat to any of its alliance partners. BJP may point out that, the last NDA candidate, B. John Pandian had contested this seat on its symbol in Tenkasi lok sabha constituency, hence, there are good chances that John Pandian may contest on BJPs symbol. 

Villivakkam assembly constituency was contested by BJP on its own strength in 2016 where it had polled around 6,000. BJP polled 27,000 votes on this seat which was double of DMDKs 13,000 odd votes in the 2024 lok sabha election. This is another seat which has been a DMK stronghold, with the exception of 2011 & 1980 where ADMK had its MLA here, who was their candidate in 2021 as well. ADMK had polled around 38,000 votes, which is fractionally less than the cummulative votes by NDA on this seat. However, that MLA & candidate, JCD Prabhakar has ended up joining Jospeh Vijay's TVK and most likely be its candidate here.  Given, he had also contested on ADMKs symbol multiple times, there maybe,ADMKs position is weak here. Therefore, provided BJPs history & the way, BJP polled votes here in 2024 Lok sabha election, there maybe the presence of an ADMK candidate over BJP symbol, which can spice up the contest on this seat.

Therefore, there is a very real chance that, BJP may end up fielding its candidates in maybe all the 6 vidhan sabha segments of Chennai Central lok sabha seat.

C. Chennai South - In 2024, this seat was contested by Dr. Tamilisai Soundararajan, former Pondicherry governor. This seat saw BJP poll 24% votes, while ADMK polled around 15% votes here. ADMK had fielded its senior leader J. Jayavardhan here, which does mean that the seat negotiations for Chennai South will be hectic for both BJP & ADMK here. All the MLAs on this lok sabha seat, are from the UPA alliance, with 5 being from DMK & 1 from INC. This allows, the NDA to try new candidates & caste combinations for this lok sabha segment.

Virugambakam seat currently has a DMK MLA at helm. In this seat, BJP polled around 45,000 votes, while ADMK polled 22,000 votes. In 2021, ADMK had fielded Virugai VN Ravi, who polled around 55,000 votes. BJPs Tamilisai Soundararajan had contested this seat separately in 2016, who polled close to 19,000 votes. This seat, has had a BJP cadre, hence BJP may ask ADMK to allocate this seat to them. However, given ADMK had its own MLAs in 2016 & in 2011 DMDK (part of ADMK alliance), hence its unlikely that, ADMK would allocate this seat to BJP. In the last election, the winning margin of DMK alliance was just 19,000 votes, hence, proper election management by BJP & ADMK may swing this seat in favour of NDA.

Thiyaraja Nagar seat, saw BJP poll around 45,000 votes while ADMK polled around 17,000 votes in the 2024 elections. ADMK had its candidate, B. Sathiyanarayan  in this seat, who barely lost by a margin of 1000 votes in that election. Though, BJP has contested this seat back in 2011 & 2016, and may have some decent candidate here, however, given the margin of ADMKs loss in 2026 was of just 1000 votes, hence ADMK wont like to conceede this seat to BJP.  However, given the historic performance of BJP on this seat, ADMK may field a candidate who is acceptable & popular to the local BJP cadres in this vidhan sabha constituency.

Mylapore seat would be another seat, which would be hotly discussed between the 2 alliance partners. BJP had its own MLA here back in 2001, in addition, BJP polled around 38,944 votes which was almost double of the votes that ADMK polled here in 2024 vidhan sabha elections which was around 22,000 votes. In the 2021 election, ADMK had its former IPS officer candidate, R. Nataraj, who polled 55,000 votes here. However, givem BJPs historic performance & the rise of TVK in Chennai city, which may see its top leaders like Vijay contest in the city, BJP may push ADMK to allocate this seat to them. However, even if ADMK contests this seat, they would require help from BJPs cadres to win in this vidhan sabha constituency. Therefore, there is a good possibility that BJP will contest this seat.

Velachery is another seat, which would be hotly debated between the cadres of the BJP & ADMK. BJP polled around 51,000 votes compared to ADMKs 23,000 odd votes in this seat. ADMK had contested this seat in 2021, with MK Ashok being its candidate back then, he had polled upto 64,000 votes here. He had lost with a bare small margin of around 4,000 votes. BJP had contested this seat independetly in 2016, where it had polled around 15,000 votes. Given, AMMK had also polled around 1,500 votes here in that election, therefore, BJP may ask its good friend TTV Dhinakaran to help it in alliance talks with ADMK, which may see a consensus candidate on BJP symbol. There is a good probability, that ADMK will conceede this seat to BJP in return for a candidate who can work with ADMK & AMMKs cadres.

Saidapet, is another seat which has been BJPs area of focus since the time of Atal Bihari Vajpayee. BJP has contested this seat in 1991,1996,2006, 2011 & 2016. The last time, BJP contested here, it had polled 6,000 votes roughly. BJP had recieved around, 28,000 votes in this constituency which was just 5000 votes more than ADMKs performance here. Additionally, ADMK had fielded its first Chennai city mayor, S. Duraisamy in 2021 where he had polled around 50,000 votes. Therefore, the presence of an established candidate & a small gap between the NDA constituents in LS 2024 election, may dampen BJPs chances of fielding its own candidate here

Shoziganallur, is one of the most densely populated seats of Tamil Nadu. DMK had polled 1.2 lakh votes here in the 2024 Lok sabha elections, BJP was at second which polled 81,000 votes & ADMK had polled 63,000 votes. In 2021, ADMK had contested this seat, where it had polled, 1.36 lakh votes but lost to DMK by around 35,000 votes. Given, TVKs entry & the strong presence of NTK in the last elections, it is unlikely that,  ADMK would give this seat to BJP, given that BJP did contest here back in 2016 where it finished an abysmal 4th position. Therefore, the probability of BJP contesting this seat is really low.

3. Madurai - In this lok sabha seat, the most interesting set of results were posted in the lok sabha elections. This lok sabha seat, has seen, BJP bigwigs like Narendra Modi & Amit Shah visit repeatedly. BJP had finished second in this seat, which is considered as the cultural heartbeat of Tamil Nadu, by polling 22% votes, while ADMK had polled around 20% in this seat. DMK ally CPM had polled just around 43.6% votes here. ADMK currently has MLAs in Melur & Madurai West constituency, hence, common wisdom suggests that, most likely, BJP wont stake claim to these vidhan sabha segments.

The 4 other seats, has MLAs from DMK (3) & MDMK. Additionally, the rise in support by Thevar community, along with the controversial Thiruppanakundaram issue, will push BJP to negotiate hard with the ADMK for some winnable vidhan sabha segments here. BJP candidate here, was Prof. Raama Sreenivisan.

Madurai East - BJP had polled close to 43,000 votes in this seat, compared to ADMKs, 39,000 votes.ADMK had contested this seat in 2021 vidhan sabha elections, where its candidate, R. Gopalakrishnan had polled around 73,000 votes. He had lost the elections by a margin of almost 50,000 votes. Given, this seat has had multiple ADMK MLAs in the past, hence the chance of this seat having a BJP candidate seems less likely as of today. BJP has contested this seat back in 2016, but the performance was not that great, where it had polled only 6,000 votes. BJP contesting this seat looks less likely.

Madurai North- BJP & ADMK polled almost the same number of votes in 2024 Lok sabha elections. This seat was contested by P. Sarvanan of BJP in 2021, who polled around 51,000 votes. He later joined ADMK. P. Sarvanan has been a former MLA from this place with multiple stints in MDMK, DMK & BJP. Hence, given, that BJPs candidate has joined ADMK, hence ADMK not staking claim to this seat would actually be very surprising.

Madurai South - BJP & ADMK polled 42,000 & 25,000 votes here respectively in 2024 lok sabha elections. This seat in 2021 was contested by SS Sarvanan of AIADMK, who had polled around 56,000 votes, while losing the elections was a  bare margin of 6,000 votes. BJP had contested this seat in 2016, where it had polled around 16,000 votes. This seat had also seen, AMMK poll around 2500 votes in that election, hence, given BJPs background, recent performance, local cadre strength & likely support from AMMK, BJP may have its own candidate in this prestigious constituency.

Madurai Central is the last seat in this lok sabha constituency. BJP had polled 29,000 votes here while ADMK had polled 25,000 votes here. ADMK had contested this election, but the candidate, N. Jothi Muthuramalingam had lost by almost 34,000 votes in this constituency. While given, the total votes are around, 54,000 in this seat in 2024 Lok sabha elections, hence there is again a good chance that, BJP may end up contesting this seat, however, it would require a candidate from ADMK as, the last time BJP had contested here, it had polled only 6,000 votes. Hence, this is another seat, that ADMK may like to allocate to BJP, while sending its candidate on the lotus symbol. 

4. Nilgiris - This seat is located in the heart of Kongu Nadu. Nilgiris lok sabha seat, saw BJP candidate  & union MoS,  Dr. L. Murugan finished second by polling 22% votes, while ADMK polled 21% votes here in the 2024 Lok Sabha election. ADMK currently has MLAs in 4/6 assembly segments, hence, it is very unlikely, that, it would end up allocating these seats to BJP, where it already has MLAs. However, there are 2 seats in the seat namely - Conoor & Udagamandalam, where BJP may end up contesting. One of these seats is with the Congress party & 1 is with the DMK.

Udagamandalam- This seat saw, BJP poll around 36,000 votes while ADMK polled 20,000 votes in the election. BJP had contested this seat in 2021 and had polled 61,000 votes. Hence, even sans the alliance, BJPs cadre strength here, seems to be strong enough to warrant a re contest with its own candidate. BJP has contested this seat consistently, since 1989 which should also be a reason, why ADMK may end up allocating this seat in the alliance to the BJP.

Conoor - This seat saw BJP poll around 29,000 votes while ADMK polled 20,000 votes in the election. ADMK had contested this seat in 2021 and had polled around 57,000 votes. However, given, ADMKs abysmal performance here without the BJP, shows that again BJP has a better cadre strength in this seat, which may end up contesting this seat. BJP has contested this seat a few times, but has never polled a lot of votes here.

Though, the BJP has outperformed, ADMK, in 2024 Lok sabha elections in the vidhan sabha constituency of Mettupalayam, however,ADMK may hesitate in allocating this seat to the BJP, however, it may allocate a candidate who can closely work with the local BJP cadres.

5. Vellore - This seat was contested by New Justice Party's chief, AC Shanamugham on BJP symbol. Vellore currently has 2 ADMK MLAs hence, common political wisdom suggests that, BJP may not ask ADMK to allocate those seats to them. AC Shanmugham while contesting on BJP symbol had polled around 3.5 lakh votes & 31.25% votes, which pushed ADMK to lose its deposit on this seat. This may push AC Shanmugham's outfit to demand more seats from ADMK, where BJP may play the mediating role in negotiations and may end up benefitting in a few seats.

 

Vellore (VS) - BJP polled around 65,000 votes here while ADMK had polled just 11,000 votes in 2024 lok sabha elections. ADMKs candidate here in 2021 was SRK Appu who had polled 75,000 votes back then. Given, the massive difference of the votes between the NDA constituents, BJP may try to convince ADMK to let, it field AC Shamugham on its lotus symbol. Also, given, ADMK has historically struggled in this seat since 1977 where it had its MLA only twice, ADMK may not be averse to allocating this seat to BJP which may field AC Shanmugham on its symbol. BJP has contested this seat consistently, from 1996 onwards with 2 breaks only in 2001 & 2021.

Anaikattu - BJP polled 71,000 votes here while ADMK polled 20,000 votes in 2024. ADMK had contested this seat in 2021 where its candidate was D. Velazaghan who lost the election with a paltry margin of only 7,000 votes. BJP has contested this seat back in 2006 & 2016, but given, ADMKs performance in both election, may not help BJP to stake claim over this seat.

Gudiyattam - BJP polled close to 58,000 votes here while ADMK polled 21,000 votes in 2024. ADMK had contested this seat in 2021, where its candidate, G. Paritha lost by a small margin of 7000 votes. BJP has never contested this seat in its history. Given, ADMKs cadre strength & nature of state elections in TN, ADMK will be averse in allocating this seat to BJP.

Ambur - While BJP polled 47,000 votes & ADMK polled 19,000 votes in 2024. ADMK had contested this seat in 2021, where its candidate had polled around 40% votes. BJP has contested this seat in its history, where it finished fifth twice. Given, ADMKs poor performance here, it may like to allocate this seat to BJP, however, given the high proportion of minority population on this seat, BJP may not wish to take this seat. Therefore, this seat would also likely have an ADMK leader.

Conclusion - 

Based on seat by seat analysis of close to 7 lok sabha seats & 26 vidhan sabha seats, where BJP did poll decent number of votes in 2024 Lok sabha elections, there is a possibility that, BJP may end up contesting on close to 11 to 12 seats in the ongoing seat negotiations. However, given, political complexities this prediction may or may not be true, which should be known in a matter of few days.

India - Bhutan Customs Union :- A Possible Checkmate Move In Himalayas

India - Bhutan relations

Context -

South Asia is one of the most populated regions of the earth. The sub contiental region consists of countries like India, Pakistan, Bangladesh, Bhutan, Nepal, Myanmar, Sri Lanka, Maldives & even China to a geographical extent. The total population of this sub continental region, is around 2.2 billion, which is around 1/3rd of the world's population. Coming from this region, has also resulted in a lot of geopolitical competition between the countries, which has often resulted in tense millitary faceoffs between these nations. One of the 21st century sub regional geopolitical rivalry driving the South Asian Indian subcontinent is undoubtedly between India & China.

One of the tense battlegrounds in this rivalry is in Bhutan. Bhutan and North East India especially Arunachal Pradesh has been a tense battleground between the 2 Asian supergiants. Over the past years, tense faceoffs have occured in Doklam in 2017, the building of dams over Brahmaputra Mahabahu river by both millitary powers, Galwan faceoff of 2020, banning of Chinese apps in 2020 & claims over Indian state of Arunachal Pradesh by China. The one country, that has recieved a lot of attention, between this geopolitical tug of war is Bhutan. 

India - Bhutan Relations background :

Bhutan is a peculiar nation state and is the textbook definition of a country, which is sensitive to its own culture & does not involve itself massively into global affairs of the world. Bhutan enjoys the status as a protected state to India, under a treaty signed between the Kingdom of Bhutan & British India back in 1910, which has still continued today. This had happened after the Chinese expedition of Tibet in 1910 and post the 1962 India - China war which also occured due to the Tibetan issue, between the 2 countries, the ties between India and the Buddhist Himalayan kingdom have further deepened. In the past years, Bhutan's king has also visited many Indian states routinely.

However, since 1972 the countries had a massive change in relationship, including a review of the friendship treaty of 2007 which allowed Bhutan to decide on its own arms imports & Bhutan also ended up joining the UN in 1972 in this time. Prime Minister Narendra Modi was also honored with the Order of Druk Gyalpo in 2025, which shows that despite changes in bilateral relations, the relationship between the 2 countries, extends more than just economic & millitary benefits. The list of visits between different Indian delegations like that of president, prime minister, chief ministers etc.can be found here. 

Trade relations have prospered between the countries in this period from 1972 onwards. The India - Bhutan, Agreement on Trade & Commerce established a free trade framework that laid the institutional foundation for bilateral trade. The overall trade between these 2 countries, rose to around US$ 1,777.44 million which is more than triple since 2014.India due to its superior economic size, enjoys a trade surplus with Bhutan. Since, 2014, India - Bhutan has had a CAGR of around 13.9%. The biggest trade contributor between these countries, is undoubtedly hydropower & infrastructure funding, which has led to a solid economic growth in both these countries. For starters, Bhutan, also grew at 4% in FY 2024, which is impressive given the troubled geopolitical waters of the Indian subcontinent since the coronavirus pandemic.

Customs Union Idea - 

All of this coupled with India - Bhutan friendship treaty of 1949, where Bhutan has allowed India to "guide" its foreign policy creates an opening which many Indian diplomats & bureaucrats are not thinking about. This pertains to formalising the India - Bhutan relationship into a customs union, which will bring in massive economic & diplomatic benefits to both the countries. 

Now, for starters, customs union is a trade agreement between countries that eliminates internal tariffs on goods & establishes a common external tariff for imports from non member countries. The customs union promotes free trade between the members while adopting a uniform policy against external countries. Countries, usually adopt this policy  to improve their economic standing while teaming up with "like minded" parties to corner a bigger power. In a customs union, multiple things come under the agreement, like a common currency, common trade policy, harmonized indirect tax mechanisms amongst other features.

Now, maybe customs union can be seen as a hindrance to multilateral trading system, however, this system has been widely practiced by many countries. The best example of customs union is between Switzerland & Leichtenstein, which has a single currency (swiss franc) & has adopted a common trade policy since many decades now.

In fact, the economic relations between India & Bhutan, has been said to be a part of quasi customs union, as, Bhutan's 90% trade is with the Republic of India, Indian rupee is a legal tender in Bhutan, BHIM UPI is accepted in Bhutan, the only thing missing between the 2 countries is the presence of a unified trade policy & a harmonized VAT system which can be a big diplomatic success for India. Given, India has been on a spree of signing free trade agreements with different countries over the past 3 years with major examples being - Australia, New Zealand, the USA (tentatively), UK, EFTA, EU & UAE being the best mirror of the FTAs that India has signed.

Furthermore, given, the historical proximity  between India & Bhutan, along with the similar cultural proximity with respect to trans Himalayan Buddhism, a proper customs union arrangement will also be accepted sans hostility between the 2 countries. Additionally, geographically, Bhutan can act as a critical refuelling point for Indian armed forces, which can also pave way for additional infrastructure project in the Himalayan country, which can not only prove to be a startegic masterstroke for India but would also enhance connectivity between mainland India & Northeast India, while diversifying the startegic importance from the critical "Chicken Neck" coridoor. Given, that India guides Bhutan in its foreign policy decisions and trains the Royal Bhutan Army via the Indian Millitary Training Team, a customs union formalisation should not be a major challenge

Also, given, that, Bhutan has also recently introduced a single taxation system of VAT in 2022, while replacing Sales Tax & Customs Duty. Bhutan adopting the GST regime of India with some minor changes should also not be a major bottleneck, between the 2 neighbours. Furthermore, to incentivise & deepen  the bilateral relations, between both the countries, Bhutan must be advertised as a tourism spot, by the Indian government & content creators which can prove to be a massive gamechanger for beautiful Bhutan's economy, where tourism contributes to around 6% of the overall GDP.

Furthermore, in a customs union agreement, agricultural export tariffs from Bhutan can be completely slashed to zero, which will allow for controlled competition for products like rice, horticulture & wheat in certain states of Northeast India, which will allow for major productivity boost for India's agricultural sector. Finally, Bhutan's cricket team should be allowed to be a part of India's domestic system like Ranji Trophy, SMAT etc. which will improve the sporting relations between the countries, also as a goodwill gesture, the Faridabad cricket ground in Haryana which has been used for very few matches can be given to Bhutan under a revenue sharing agreement as a home ground, this will be seen as winning over critical optics for the country.

Formalising, a customs union agreement between India & Bhutan, can bring in multiple optical victories for India. India has long been seen as the king of tariffs and the upgrade from a quasi customs union to customs union, will allow India to negotiate more confidently in the plurilateral agreements at conferences such as the MC - 14, which will be a major gamechanger for multiple Indian sectors. A customs union agreement between India & Bhutan, will additionally allow the RBI to internationalise the rupee which is already a legal tender in Bhutan. Such an agreeent will also help, India to strengthen the rupee in today's super charged currency markets, while protecting the Ngulrum from further volatile changes in the currency markets. In fact, India can assist, Bhutan in developing as a financial tax heaven like how Leichtenstein is for Switzerland in today's day & time. India can in fact, even try to lure, international organisations from cities like Geneva, by using Bhutan & Northeast India as a front. Such a customs agreement will further cement India's Act East policy, which has been in existence since 1990s.

Overall, a customs union between the 2 countries is a win - win agreement for the both and the Indian establishment needs to look at this seriously, not only from a trade perspective but also from a perspective of national security, economic security & diplomacy, which is very crucial for the 21st century for the developmental journey of South Asia. This kind of customs union formalisation, will also checkmate the ambitions of an expansionist China & an unpredictable USA in the great long game of Himalayas.

Sectors Which Can Be Big Winners From Budget 2026

The Indian union budget 2026 is around the corner and as always, the talks are on about which sectors can benefit massively from the upcoming budget. The budget in India, unlike other countries is still very important, because, it is one of the mechanisms that links monetary policy to fiscal policy in the country. This article seeks to analyse, which are all the sectors that can benefit from the upcoming union budget in the country.

(1) Trade sector - One of the sectors,which should logically benefit is the trade sector of India. Trade in the country has been hit hard, with multiple geopolitical shifts that have occured in the past year and with the threat of 500% Trump tariffs looming high. Coinicidentally, this sector has also performed well in the past year, while posting decent trade surpluses and closing out multiple trade deals like the India - Oman FTA & India - NZ FTA, while having a good pace of progress on the India - EU FTA. However, given that USA is India's biggest trading partner, measures like - ECLGS for the exporters, along with possible hikes in customs duty over agricultural imports which has been a bone of contention between India & USA in ongoing trade talks, along with increased budget allocations for the INSTC, restarting of ITS service which has  been a demand from many & maybe Chabahar Port can be the big reforms that the trade sector can see in this particular budget. Many articles have already been authored over this blog for this particular sector.

Its critical for the government to also invest big in the trade sector to first stabilise the rupee's constant depriciation against almost all the major trading currencies of the world & to also assuage concerns of the constant FII outflow which has occured in the past 3 quarters, which is concerning for a country like India, which still requires foreign capital to aid its development.

(2) Dairy sector - Dairy sector in the NSE is led by an unlisted AMUL which has increased its brand presence in USA & EU countries over the past year. Dairy is an interesting sector for India, as per the recent comments by NDDB chief Manesh Shah, India is poised to produce 33% of world's dairy needs by the next decade and to the sector's credit, India is already the largest producer of dairy related products in the world. In fact, the India - New Zealand FTA was criticised recently by ministers in New Zealand, primarily because, India refused to give any concessions over dairy industry which is India's direct competitor. The sector contributes around 4% to India's 4.5 trillion$ GDP & supports 80 million rural households, which is also a massive figure considering India's agricultural population. 

The output of the dairy industry shows that, it remains a productive agricultural industry in the country. Dairy productivity in the sector is really low when compared to other countries like the USA, which this union budget should ideally try to introduce mechanisation measures for this particular industry. Increased allocations for schemes like Rashtriya Gokul Mission can also be thought of in this particular budget. The budget for this ministry in the last 3 budgets was roughly around 4000 crore INR, which can see an increase in this particular budget. Marketing related reforms for the smaller dairy companies or schemes like ECGLS for the weaker dairy companies can also be thought about in this particular budget.

Additional reforms in this sector can be of, employing young professionals, consultants along with probably solving the decades long issue of double regulation for cooperative banks, which are increasingly at a risk of being insolvent, possibly under the RBI, which can bring much needed benefit for this sector which can be a sunrise sector for the country.

(3) Defence - Defence is all set to be  the biggest winner in this union budget. The past year, India has faced multiple geopolitical challenges. The Indian Air force led Operation Sindoor, the constant commissioning of new ships by the Indian Navy & the increasing need for modernizing the armed forces is one of the biggest reasons why the capital expenditure over this sector can be around 10 lakh INR for this particular year. The bigger reform in an ideal world, would be however, to reduce the pensions component for the defence ministry which subsumes 40% of the budget every year, possibly introducing the UPS scheme for the retired officials, can help in better managing the fiscal resources, given the time has come to increasingly modernize the 3 forces.

Given, India also aims to get around 10% of defence exports in the global arms market by 2030, possible reforms can be - reintroducing defence coridoors in states like Madhya Pradesh, Uttar Pradesh, Rajasthan, Bihar, Odisha & Andhra Pradesh, which are in dire need of expanding industrial manufacturing in their states, this reform used to be a highlight in union budgets up until 2022, but since then has gone quite in the last 4 budgets in the country.

Additional, reforms in this sector can include - home production of nuclear submarines post the SHANTI bill, home production of fighter jets, concluding deals like Rafael jets and FII related reforms with respect to the IDEX program can be big winners. Furthermore, we can see an increase in budget for hiring Young professionals & consulants for this sector.

If possible, the sector must also look to increase the presence of defence related think tanks in the country to multiple cities, instead of being concentrated only in the India Habitat Centre of Lutyens Delhi, which has become synonymous of control by some retired bureaucrats who are not even graduates in defence related subjects (economics or international relations) & whose only shot to fame is clearing an exam almost 50 years ago. Such kind of control disincentivizes youngsters to undertake any productive research undertaken in this field. This was particularly clear, as seen during the aftermath of Operation Sindoor where it took almost a year to convey to the world that India had won decisively during the war.

The possible reform can be to increase offices of organisations like RIS, MP - IDSA & giving serious financial impetus to defence related magazines in India in the other cities like - Hyderabad, Bengaluru, Mumbai and Ahmedabad and inviting foreign think tanks to set up their offices outside the confines of Lutyens.

(4) Urban Development - Urban development must be a big winner in this budget, given that urban areas in the country have consistently voted in the favour of BJP. Given, the need of reforms in urban governance, the first logical step can be to increase the budget for the sector upto Rs. 15,000 crore. The urban governance area really needs massive infrastructure push, along with  converting tier 2 cities into tier 1 cities, improving satellite cities in the country, rebirthing the Smart Cities mission/AMRUT Bharat scheme/ Swach Bharat scheme & financially supporting states like Andhra Pradesh, Chhattisgarh & Maharashtra, who are investing massively in creating new cities of - Amravati, Nava Raipur & Greater Mumbai area. The government, must also adopt 4, tier 3 cities namely - Bastar, Dimapur, Warangal & Barmer and develop them as model cities in the country.

This would help states to take a conscious decision to upgrade cities can help in the country achieve development priorities. A big reform can be to give greater share of funds via schemes to the states investing in such projects. The metro expansion, bullet train expansion, inland ports & RERA related reforms can also be possible gamechangers for urban development in the country.

(5) Unconventional Sectors - They are a few unconventional sectors which can also benefit from the budget, namely - nuclear energy, insurance & cartography. Nuclear energy has been identified as a big sector which can secure Indian energy needs & the liberalisation done in cartography back in 2023, can also see big investments this time around. Insurance sector can see a big change, because the country has a lot of uninsured people and just making it compulsory before the census can see massive valuations in this sector.

Additionally, the mission to eradicate manual scavenging, covering gig workers under PMJAY scheme & TB can be bigger social schemes which can turn around the lives of people qualitatively.

Overall, the budget presents an opportunity for development for many sectors and can qualitatively change the lives of people for the better.

Indian Rupee As A Regional Hegemon - A Realistic Possibility Or A Far Fetched Dream:- Economic Analysis

Courtesy :- Marketcalls

Introduction -

Indian Rupee has been at a center of debate for many years now. The Indian rupee is the official currency of the fourth largest economy of the world. Indian rupee represents a history of monetary policy and fiscal policy reforms. For many of the starters, Indian rupee as a currency came into existence in the early 16th century and since then has undergone many changes. Today, the rupee stands at an interesting juncture where the Narendra Modi government is looking to internationalise the rupee through interesting means like the UPI, opening of vostro accounts in Russian banks etc. can the efforts of seeing the INR as a regional hegemon a realistic possibility or is it a far fetched imagination, is what the article tries to analyse today.

Confidence behind rupee internationalisation decisions -

Internalisation of the rupee has been a constant chatter in the monetary and fiscal policy of circles since the coronavirus pandemic, where the Indian economy showed massive economic resilience by lodging growth rates which have helped it to be the world's fastest economy since the past 5-6 years.

Even, during the past 4 years, since the start of the Russia - Ukraine war, which has crippled major european economies, including EU, whose overall growth rate for Q2 of FY 2025 was as low as 1.4%, India has maintained an average growth rate of 7.2% which shows that the Indian domestic demand, exports amongst the reform oriented policies are actually helping the economy emerge from the shadows. This is a smart step as India's merchandise trade has constantly increased 

Another reason, why this growth rate becomes important is because, over the past 4 years, the South Asian region has been a geopolitical pandora box. The major changes in this region have been:- Brutal coronavirus pandemic, Taliban takeover of Afghanistan which occured in 2021, Pakistan's ever volatile domestic policies and the dictatorial ironclad policies of the millitary, Sri Lanka's economic crisis which overthrew the Rajpaksha brothers, Nepal deposing off the entire political system dominated by the Communists & Nepal Congress, Bangladesh seeing anti Awami League protests along with the installation of an "interim" PM Md. Yunus by the West who is hestitant in conducting elections, India's successful Operation Sindoor against Pakistan post the Pahalgam terrorist attacks have been some of the events that could have shocked even the world's most resilient economies and India itself has seen many motivated protests.

In the backdrop of so many protests, India maintaining strong growth rate should be rated by the economists as the "21st century miracle".

Hence, the growth that India has recorded over the past 4 years is the credit to major reforms that the country has consistently seen since the 1990s and more specifically post the 2016 demonetisation. Factors like smart monetary policies of the RBI, political stability in India, strong international exports, near elimination of absolute poverty from the country etc. have aided this growth journey. This is the prime reason why the Government of India & RBI are confident enough that now is the right time to internationalise the rupee. The 2 graphs below show about India's external sector in detail.

Source: BIS

 

Source  : BIS

Open Macro logic-

The RBI has taken massive steps in this regard to internationalise the INR over the past few years. One of the steps taken is to increase the rupee invoicing by the exporters. Invoicing in currency is a central force for the trading patterns noticed in the country. The invoicing framework system in open macroeconomics has multiple core intuitions.

Trade prices are set up in 3 broad ways, namely :- Producer currency pricing where an exporter invoices in its own currency. Exchange rate movements affect foreign prices, more than exporter revenues. This tactic or startegy though is rare as to be a PCP country, financial deepening, credible currencies & strongman geopolitical startegies are required. Hence this mechanism is used majorly by countries like - Japan, USA, Switzerland amongst others. 

Local currency pricing where the exporter invoices in importer's currency, where exchange rate movements affect exporter revenues over foreign prices. This is a tactic leading to low exchange rate pass through to import prices and muted expenditure. This mechanism is used majorly by countries like Canada & Australia. 

The third mechanism is Dominant currency pricing, most global trade is invoiced in third currency mainly USD today. The reason countries do so, is because it helps in minimising transaction costs, hedging constraints & pricing risk, which in turn causes exchange rate movements of non dominant currencies to have weak effects on trade volumes, but has strong effects on domestic inflation. Hence, the cost of any country importing inflation in a DCP mechanism, especially in the backdrop of geopolitical tensions or interest rate changes is quite real and does not help in insulating the economy. This can be considered as a reason why developing countries over the decades have adopted a DCP mechanism and have seen usually high inflation rates in period of high growth rates.

As. T.Rabi Shankar, pointed out in one of the BISs research, internationalising the rupee would help reduce dependence on foreign exchange reserves & project external stability. He noted in his speech, that, forex reserves of a country using DCP mechanism is borrowed funds. Banks and corporate incur external debt at market rates which are then invested in Government securities issued by advanced economies (AEs). The rate at which external debt is incurred issubstantially higher than the return on reserves. 

In layman's language, India is trying to move from the third mechanism to the first mechanism, by takingh many interesting steps.

Steps for rupee as an international currency -

Vision IAS

The RBI in this regard has taken serious steps over the past 4 years to make rupee as an international currency, as the one factor that keeps away exporters from going away from DCP to PCP is committment based monetary policy that the RBI has adopted ever since the pandemic. The one logical step is, rupee denominated trade settlement where exports have been facilitated in INR.

This has been facilitated even in by easing FEMA regulations when Open INR accounts have been launched for settling all transactions with Indian residents in abroad branches of authorised banks, this is for foreigners. Any NRI also can open their account in special vostro account, on which an excellent explanation can be found here. 

The second step, taken by the RBI & GoI is to expand the reach of UPI services in multiple countries. Today, UPI is a payment mechanism which obviously covers 40%  of the world's digital transactions per minute, but this has been expanded in countries like :- UAE, Singapore, Bhutan, Sri Lanka, France & Mauritius. The rollout does help in expanding the reach of INR in terms of invoicing and maybe even in attracting FIIs but does not help the cause of making INR a regional hegemon, as there needs to be an integration with the financial markets of these countries, which India is currently lacking.

RBI has signed MoUs with other central banks to promote local currency settlement, including rupee. Trade agreements with partners like Sri Lanka designate INR as a foreign currency. Cross border lending in INR has also started.The RBI’s Strategic Action Plan 2024–25 includes allowing persons resident outside India (PROI) to open INR accounts abroad.

All these steps can be considered as baby steps which the RBI has undertaken so far and since the decisions have barely come into force a few years ago, not a lot of analysis can be realistically done in this regard.

Future roadmap -

The success of these steps by the RBI, depend upon a host of factors which not a lot of economists have explicitly mentioned about in the past. The first factor or maybe, risk is that, as noted by T. Rabi Shankar in his speech at BIS in 2022, that India is capital deficient country & needs foreign capital to fund its growth, at this time making rupee as an international currency can be a risk which ends up losing foreign capital. The reason being so, is that, external shocks can become very prudent on the INR and the RBI would need a separate focus wing to stabilise the INR in such circumstances.

The core of this problem is that India is a labor surplus country, while being short on capital, the only possible step in this case is to do 2 things simultaneously - (1) Capital expenditure by the GoI must be increased to around 15 lakh crore in FY 2026 and bring in policies which promotes capital heavy industries & goods like rare earths, semiconductors, AI amongst others. Furthermore, private capital must step in to increase the domestic capital market (2) India must also try to attract massive FDIs in capital intensive industries which generate employment, given the labor surplus in the country, the states can very well absorb the educated youngsters into these capital intensive industries which should set up shop in the country. Furthermore, Startup India & Standup India schemes should promote capital intensive businesses and startups. The reason, why capital intensivity of a country is critical can be found in the economic growth of China, only country which can be compared to Indian economy, had the majorly "failed" cultural revolution of 1960s but the home backyard steel production model, actually helped the country to launch their much famed 1978 reforms which really helped their economy.

The second, factor underrated but very critical in what decides a currency being a regional hegemon is, geopolitical muscle power & soft power. In the inter war years, where different currencies were ruling the roost in many different countries with their own areas of influence, the major reason was imperialism and the biggest benefactor of this was the UK, whose GB Pound Sterling was official currency of as many as 70 years, this helped them to borrow more from treasury bonds. The USA , though not an imperial power, followed the policy of "gunboat" diplomacy, which helped them maintain dollar supremacy in the fiscal markets of Latin America etc.

Now, India cant follow "gunboat" diplomacy, as the USA has done over the years, the main innovation can be done in the FTAs that India has been signing recently, the countries like Oman wanting a FTA with India, must be asked to do a portion of trade (preferably of the largest net trading commodity) in INR, which will increase the net inflows of INR into the country. This can be a start, however, India should also carry out massive defence reforms like - producing more fighter engine jets, stealth submarines, using Indian Navy as a diplomatic arm in troubled Indian waters, increasing nuclear warheads, fulfilling demands like Ahir Regiment/Bengal regiment more reforms like SHANTI bill are necessary in this field. India should also try to make the neighbourhood as its own political "backyard" both in terms of financial & non financial means.

Conclusion -

Later on, India should issue treasury bonds to countries with which India enjoys good relations, possible countries include - Russian Federation, Liechenstein, Afghanistan, Israel, Iran, Ethiopia, Brunei, Maldives, Mauritius, Seychelles, Cayman Islands, Fiji, Papua New Guinea, Saudi Arabia, UAE, Sri Lanka, Nepal, Bhutan, Phillipines & South Africa to name a few. India must also try  to attract FDIs from major countries like Singapore & UAE in INR, instead of US$ which would also allow for capital injection at a cheaper rates. Even timely completion of trade routes like IMEEC & INSTC can help the country massively in this area for India.

Finally, the policy of rupee internationalisation and making it as a regional hegemon currency in troubled geopolitical times, must not be a mere footnote and must be a constant policy decisions which also requires strong fiscal & monetary policy coordination, in which India enjoys a historic stronghold. If India, is indeed able to internationalise the rupee & make it even a regional hegemon, it would be considered as a massive comeback for a country which a decade ago launched demonetisation just to battle counterfeits in its economy. 

Will RBI Trade Independent Monetary Policy To Stabilise The Rupee :- Impossible Trilemma Analysis

INR representation 

Introduction -

Recently, the Indian Rupee traded at 90.58 to the US$, which has weakened the Indian rupee significantly in the global forex markets. In fact, in the last 5 years itself, since the pandemic times, the Indian rupee has significantly depriciated against the US$ from 72 INR to 90 INR, which is a massive 20% in the last few years. Optimists, may point it as a trend that the Indian rupee has observed only against the USA, as USA's inflation has been imported into its currency and particularly, that the American economy has struggled since the pandemic, recording growth rates below its expectations. While, the current Trump tariffs on India, high interest rates in the asset markets are credited for such a weak performance of the Indian rupee against the US$, however, there are some macroeconomic fundamentals, which India is getting it wrong, which is reflected in the currency markets.

For starters, the value of a country's currency in forex markets is determined by factors like - inflation rate, interest rate, trade, net capital inflows amongst others, factors which are heavily linked with the monetary policy that the country takes. Here is where the Trilemma theory comes into play in international macroeconomics.

USD to INR

The Impossible Trilemma Theory -

The trilemma theory is central towards the working of macroeconomics in global markets. The trilemma theory basically says, that, at no point of time, a country can maintain - fixed exchange rates, independent monetary policy and free capital flows. In the ideal situation, a country can maintain only 2 of the 3  conditions, for example - during the gold standard era from 1880s to 1920s, countries maintained free capital flows and fixed exchange rates, but the monetary policies were not strong at all. Similarly, the Bretton Woods system, envisaged a system of independent monetary policies and fixed exchange rates, while curbing capital flows. Now these systems have been impacted massively, by host of factors one of them being geopolitical shocks.

This theory has also applied massively to the Indian context, for example, in the pre 1991 era, India exercised a policy of fixed exchange rates and independent monetary policy, while convinently missing out of international capital flows, while in the post 1991 reforms, India prioritized capital flows and independent monetary policies, despite facing massive economic shocks, which has resulted in India, not keeping a committment towards a peg and has virtually adopted a flexible or a floating exchange rates. This pattern can be seen, more pronounced since the 2000s, which has allowed India to gain massive access to global capital markets and keep inflation in check.

Now, economics 101, suggests that, a devalued currency, should lead to rise in trade markets which should be reflected in the currency markets of the country, however, the rising trade gaps, precisely due to higher import bills due to higher depriciation of INR,has resulted in increasing trade gaps, which is actually a worrying sign for the Indian economy.

INR performance with respect to other currencies -

This trend is worrysome, when compared even to the other currencies namely - the Euro, Swiss Franc, Japanese Yen, Russian Rouble, Britian Pound and Chinese Remnenbi, which are traded massively in the forex markets. The attached graph shows how the rupee has traded against these currencies, over the past 5 years.

A comparative graph of 6 non US$ currencies

As it can be seen from the above graph, almost all the currencies, barring the Japanese Yen have appreciated against the Indian rupee, which means that there is more to the eye than what is being predicted by "experts". The growth rates, average interest rate, inflation rates and trade deficits of all the countries has been given in the next table, to understand a better picture of what's happening with the Indian Rupee at the international market. Even the Russian rouble, has appreciated by a small margin in the last 5 years, despite the India - Russia petroleum trade going to an all time high. The same can be said, even with the currency markets of Switzerland, with whom India has signed an EFTA this year or with EU where, India has progressed ahead with the FTA or with the British Pound Sterling where India has concluded the long pending FTA this year. These factors again point to reasons apart from trade, which is resulting in the continued and to an extent the worrying trend of rupee weakening in the forex markets.

RBI's Powerplay -

The table below, shows the average interest rate in India, the average inflation rate in India, trade deficit as percentage of GDP, the net investments as percentage of GDP and average GDP growth sourced from the International Monetary Fund's World Economic Outlook report. The average data is taken from 2020 onwards. The last 5 years has been taken into account, as, the world economy has experienced significant economic shocks like - the cornavirus pandemic, the parallel expansion of BRICS, Russia Ukraine war, tariff  wars, Taliban's takeover of Afghanistan and the Middle East geopolitical crisis. In this context, it becomes important to see what kind of role did the central banks of these countries played, as majority of these countries, saw the political power of the incumbents being reduced massively.

For example:- In India, the highly popular PM Narendra Modi though is serving his third term, but had to depend on allies to form the central government post 2024 election, which has been separately analysed electorally by me, USA saw 2 different election results in 2 presidential elections in this term, Japan - EU - UK have become absolute symbols of how political instability actually looks like where dramatic events like the assasination of Shinzo Abe or the return of labor party happened in the UK after years or the different corruption scandals that hurt EU during this phase, Brazil has also seen the return of Lula da Silva and Switzerland, has had multiple referendums passed during these 5 years. In this background, it can be safely said, that the central banks of these countries have somehow managed to become the key drivers of economic growth in their countries.

Country	Avg Interest Rate (%)	Avg Inflation (%)	Current Account (% of GDP)	Net investment  (% of GDP)	Average GDP growth
India	5.2	5.4	-1.6	4.2	6.2
USA	3.6	4.2	-3.2	7.8	2.2
China	3.1	2.1	+1.4	2.5	4.8
Japan	0.1	1.2	+2.9	3.6	1.1
EU	1.5	3.1	+2.2	4.5	1.4
UK	2.8	3.7	-4.0	9.2	1.3
Brazil	9.3	6.0	-1.3	5.1	2.4
Switzerland	0.4	1.4	+4.6	6.0	1.6

As it can be seen from the above table, the average central bank interest rate in India has been at 5.2% which is almost 1.6% percentage points higher than the Fed. The average inflation rate in India over the past 5 years has been at 5.4%, which means the RBI's policy has transmitted quite successfully to the Indian economy over the past 5 years. From, the first 2 columns, it can be very safely concluded, that the RBI pursued a committment based monetary policy, towards inflation control, which proved to be successful, as reflected in the average GDP growth that the country has recorded which is almost 2% points higher than China and has stabilised inflation well, which was critical during the above mentioned period as the country could have rapidly spiralled into a zone of hyperinflation, which is not good for the Indian economy.

However, too much independent autonomy for the RBI has ended up hurting the net investment, as India trails economies like - USA, UK, Brazil and Switzerland, in attracting capital inflows (both FDI & FII), which is majorly because of the high interest rates. Monetary tightening usually, has an inverse impact on net investments as, investing in the country becomes expensive with low yields which acts as a point of negative perception for the global capital markets. In this regard, from the above table, it can be interpreted that, those countries who have had lower interest rates have ended up benefitting in terms of net capital inflows which is even more critical in today's era of open macroeconomics, where concepts like global supply chains have picked up steam.

The higher growth rates of Indian economy can be explained due to the other factors like - good management of economy during the pandemic, good diplomatic practices, high capital expenditure and an uptick in domestic consumption, which has led to the 6.2% points figure which can be seen in the economy. However, to maintain the consistent economic growth, its extremely critical that, India, exceeds the output gap, which can be possible only through increased capital flows and the widening trade gap with high import bills due to a depriciated rupee(partly due to high interest rates) is not helping the cause of the Indian economy.

Hence, the carefully thought policy of Indian government and more specifically the RBI, to keep independent monetary policy and high capital flows, while not really bothering about the fixed exchange rates is ending hurting up even the high capital flows due to a super powerful central bank which can be seen via the 2 columns of average interest rates and average investment flows.

This can end up creating a mess like, what happened during the collapse of Bretton Woods, where the capital eventually flowed into countries despite a strong affection of countries towards the peg & an independent monteary policy, this resulted in the rapid emergence of emerging economies in the world with a fledgling downfall of the advanced economies, since 1970s which accelerated even more in 2000s. To avoid, losing the current economic edge that India, has, its extremely critical, that the external sector policies are changed. The first change can be perhaps, to give back importance to fiscal policy, so that, the RBI can focus on stabilising the rupee.

Plausible Steps -

Now, Indian policymakers over the years, has avoided taking knee jerk reactions and have instead always looked for a delicate balance between the monetary policy mechanisms and fiscal policy mechanisms. Furthermore, also because the RBI, is answerable to the parliament, the government system in our country, has always stuck a good balance between fiscal and monetary policy. This was primarily seen during the pandemic, where the government adopted a classical economics approach and the RBI also responded with monetary tightening, which is a textbook example of coordination between monetary and fiscal policy interactions.

Additionally, given, how the government system, behaves in India, sacrificing the independent monetary policy may seem to be a very big ask from the RBI. Even during the 1991 LPG reforms or during the response in pandemic, the government improves fiscal policy over the monetary policy, which results in different results. 

The only possible change that can happen, is changing the budgetary outlook, something which is still considered sacred in our country. The government of India, should perhaps consider, again increasing the capital expenditure to around 11 lakh crores (something that helped during the pandemic) and again starting the process of divestment of sick PSUs like Container Corporation of India, restarting the SEZs to boost exports something that I advocated in this blog long back and concluding the trade deals as quickly as possible for which the now out of favour idea of Indian Trade Service must be reintroduced in a massive scale by the UPSC and finally, the government, must allow 75% FDI into sectors like civil aviation, telecom, steel and maybe one or two, manufacturing based industries, which can really increase the job creation capacity of the economy. Moreover, the government should really speed up the 2 proposed projects of the INSTC route and Chennai Vladivostok logistics deal, which should also provide significant impetus to the economy and to the rupee in general.

The government, can take these steps, because of 2 factors - (1) The humungous scale of victories of the BJP in Bihar, Maharashtra, Delhi  & Haryana, which has again increased the political power of Narendra Modi, who is  the most reform oriented prime minister in Indian history and (2) The government has been cutting its fiscal deficits in a big manner since the last 2 budgets, which gives a fantastic legroom for the finance ministry to again increase capital expenditures, which can give massive boost to the economy. 

Finally, the RBI, should really considering steps like, cutting down the interest rates and maybe, selling of forex reserves which are at an all time high right now, to stabilise the rupee in international markets, adopting the dirty float by not allowing the rupee to depriciate below 85, as prolonged weakness of any currency ends up hurting factors like - investors confidence, export competitiveness which cumulatively, dents, the perception of the Indian economy. 

Conclusion -

While a tradeoff for independent monetary policy for the fixed exchange rate, seems very unlikely in India, the least we can do, is to maybe, empower the fiscal policy more and maybe, adopt a dirty float for like 2-3 years, to just stabilise the rupee from taking further geopolitical risk hits, while continuing on the path of reforms.