Why Overseas Remittances by Indians Under LRS Dropped 29% in February 2025
Under the Reserve Bank of India’s (RBI) Liberalized Remittance Scheme (LRS), Indian residents’ overseas remittances fell sharply by 29% in February 2025, from $2,768.89 million in January 2025 to $1,964.21 million. According to the most recent RBI data, this decline is among the sharpest monthly declines in recent memory, with notable declines in important categories like travel (-33.77%) and study abroad (-50.52%). The abrupt decline prompts inquiries into the causes of this pattern and its consequences for India’s economy, foreign exchange reserves, and international ambitions. In this blog, we break down the causes of the drop, examine its wider effects, and consider the implications for Indian households and policymakers.
Understanding the Liberalised Remittance Scheme (LRS)
The LRS, which was first implemented in 2004, permits Indian citizens to send up to $250,000 abroad for approved purposes, such as gifts, investments, travel, education, and medical care, during the April–March fiscal year. For India’s middle and upper classes, it has been a vital facilitator of international investment, education, and mobility. Remittances under LRS, however, are strongly correlated with global trends, regulatory modifications, and macroeconomic circumstances—all of which were major contributors to February’s decline.
The Numbers: Breaking Down the Decline
- Overall LRS Outflows: Fell to $1,964.21 million in February 2025 from $2,768.89 million in January—a 29% drop.
- Travel Remittances: Dropped 33.77% to $1,090.61 million (from $1,646.74 million).
- Education-Related Remittances: Plunged 50.52% to $182.17 million (from $368.21 million).
- Other categories, such as gifts and investments, also saw moderate declines.
This decline comes after strong LRS outflow growth, which spiked after the pandemic as demand for travel and education increased. What, then, caused the downturn in February?
5 Key Reasons Behind the Decline
1. Impact of Stricter Tax Compliance Measures
One important contributing factor is the 20% Tax Collected at Source (TCS) on foreign remittances over ₹7 lakh per year included in the 2023 Union Budget. Although the tax was intended to increase compliance and curb excessive outflows, its phased implementation created a rush in January 2025 as individuals and families front-loaded remittances before stricter enforcement began. For instance:
- Students paying tuition fees for foreign universities remitted funds early to avoid higher TCS liabilities.
- Travelers planning mid-2025 trips advanced their forex purchases to January.
This “cliff effect” explains the steep month-on-month drop as demand normalized in February.
2. Seasonal Adjustments Post-Holiday Travel Boom
January typically sees a seasonal spike in travel-related remittances due to:
- Winter vacations: Families traveling abroad during school breaks.
- Advance bookings: Payments for summer trips made in January.
By February, this demand tapers off, contributing to the 33% decline in travel outflows.
3. Weakening Rupee and Rising Forex Costs
Between September 2024 and February 2025, the Indian rupee (INR) lost 4.5% of its value to the US dollar, increasing the cost of travel and education abroad. For instance:
- A semester fee of $20,000 would cost ₹16.4 lakh at ₹82/USD (September 2024) but ₹17.4 lakh at ₹87/USD (February 2025).
This eroded purchasing power, forcing families to delay or reduce overseas expenditures.
4. Policy Shifts in Education Destinations
Countries like the UK, Canada, and Australia—top destinations for Indian students—have tightened visa rules and raised tuition fees:
- The UK scrapped post-study work visas for non-research students.
- Canada capped international student enrollments to address housing shortages.
These measures dampened demand, reflected in the 50% drop in education remittances.
5. Domestic Economic Pressures
Households were forced to prioritize essential spending over discretionary categories like travel due to rising inflation (6.2% in January 2025) and stagnant income growth. Due to financial limitations, middle-class families in particular postponed plans for international education.
Broader Implications of the Decline
For the Indian Economy
- Forex Reserves Relief: Lower outflows provide short-term relief to India’s forex reserves, which had dipped to $580 billion in January 2025.
- Reduced Current Account Pressure: A narrower current account deficit (CAD) could stabilize the rupee.
For Households and Students
- Delayed Aspirations: Middle-class families may postpone overseas education or opt for domestic alternatives.
- Higher Financial Burden: Those needing to remit funds now face elevated costs due to TCS and a weaker rupee.
For Global Universities and Tourism
- Revenue Loss: Institutions in the US, UK, and Australia reliant on Indian students may see enrollment drops.
- Tourism Sector Impact: Destinations like Thailand and Europe could experience fewer Indian travelers.
RBI and Government Response
Policymakers face a delicate balancing act:
- RBI’s Stance: Likely to maintain LRS limits but monitor outflow trends to prevent excessive rupee volatility.
- Government Measures: May review TCS thresholds if the decline persists, especially amid lobbying by education consultancies and travel agencies.
Long-Term Outlook: Will LRS Outflows Rebound?
While February’s drop is significant, long-term demand for overseas education and travel remains robust. Key factors to watch:
- Rupee Stability: A stronger rupee could revive remittances.
- Global Policy Reforms: Relaxed visa rules or scholarships may reignite student interest.
- Domestic Alternatives: Growth in Indian universities and medical tourism could reduce reliance on LRS.
A Temporary Dip or Structural Shift?
The sensitivity of cross-border flows to global, economic, and regulatory factors is highlighted by the 29% decline in LRS remittances. The resilience of India’s aspirational classes indicates that this is probably a short-term correction rather than a long-term trend, even though seasonal factors and stricter tax laws account for a large portion of the decline. For the time being, households and policymakers must negotiate a situation where fiscal realities and global aspirations clash; this conflict will influence India’s economic story in the years to come.
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