ARAI drops two-rate foreign exchange proposal after industry pushback

ARAI has dropped its two-rate forex proposal for FY27 DVA calculations under the auto PLI scheme after automakers flagged audit, compliance and paperwork concerns

The Centre-run Automotive Research Association of India (ARAI) has agreed to drop its proposal to use two fixed foreign exchange (forex) rates in financial year 2026-27 (FY27) for domestic value addition (DVA) calculations under the automotive production-linked incentive (PLI) scheme. ARAI’s decision comes after automakers opposed the move over audit complications and increased paperwork, Business Standard has learnt.

 

At a meeting with automakers on June 25, ARAI agreed to adopt a single reference exchange rate for the entire FY27. The decision came less than a week after the ARAI had proposed using two different fixed exchange rates during the year. 

DVA refers to the share of a vehicle's value (in revenue terms) created within India. Under the auto PLI scheme, a vehicle model generally needs at least 50 per cent DVA, meaning imported content must remain below 50 per cent of its ex-factory value, to qualify for incentives. 

The Indian rupee has depreciated significantly in the last one year, especially after the West Asia conflict began on February 28 when Israel and the US conducted military strikes on Iran.

 

The Society of Indian Automobile Manufacturers (Siam) on June 3 wrote a letter to the Ministry of Heavy Industries (MHI), stating that the rupee's sharp depreciation had increased the value of imported components used in DVA calculations even though there has been no corresponding change in companies' actual import quantities. The forex issue has delayed several fresh applications and revalidation requests under the auto PLI scheme. Therefore, a single fixed forex rate was needed for DVA calculations in FY27, the letter said. 

To resolve this issue, ARAI held a meeting with automakers on June 19. However, it proposed two rates: ₹87.52 per dollar from the date of implementation until September 30, 2026, and ₹89.27 per dollar from October 1, 2026 to March 31, 2027. The proposal was based on the Reserve Bank of India's (RBI's) average reference rate for June-November 2025 and an assumed 2 per cent half-yearly depreciation of the rupee. ARAI's analysis of RBI reference rates over the past three years showed an average 2 per cent increase every six months. That is why its forex rate for the October-March period was fixed at ₹89.27. 

Automakers opposed the proposal on two counts. First, they said the exchange rates proposed by ARAI were higher than the industry's preferred benchmark. Second, they argued that changing the exchange rate midway through the financial year would create significant paperwork, reconciliation, and audit challenges for fresh applications and products undergoing re-evaluation. The industry instead sought a single exchange rate for the entire financial year, and ARAI accepted that request at the June 25 meeting. 

Its June 25 presentation referred to a May 2022 clarification issued under the auto PLI scheme, which says forex rate fluctuations must not affect DVA certification for products that had already been approved, provided there was no significant change in their supply chain. 

The June 25 presentation also recorded Siam's proposal to use a single fixed exchange rate for the entire financial year based on RBI's average exchange rates during FY24 and FY25, which the industry considered relatively stable years. However, ARAI proposed using the average RBI reference rate for June-November 2025, saying the exchange rate had risen sharply only from December 2025 onwards. 

Accordingly, ARAI proposed a single reference rate of ₹87.52 per dollar. The rupee has depreciated by about 10.7 per cent against the dollar over the past year, with the exchange rate weakening from ₹85.78 per dollar on June 6, 2025, to ₹94.95 per dollar on June 6, 2026. 

ARAI, MHI, and Siam did not respond to Business Standard’s queries on this matter.

 

Decision rollback

• Automakers opposed the move over audit complications and increased paperwork
• ARAI agreed to adopt a single reference exchange rate of ₹87.52 per dollar for entire FY27
• Under the auto PLI scheme, a vehicle model generally needs at least 50 per cent DVA
• Forex issue delayed several fresh applications and revalidation requests under the auto PLI scheme