The external sector is how India meets the rest of the world: what it exports and imports, how capital flows in and out, and what the rupee is worth. It began as a crisis story (the balance of payments crisis of 1991 triggered liberalisation) and is now a policy story about the rupee, the current account deficit and foreign capital.

What UPSC asks

Prelims: which items fall in the current account and which in the capital account; FDI vs FPI; NEER and REER; devaluation vs depreciation; components of forex reserves; current and capital account convertibility; FEMA.
Mains GS III: effects of liberalisation, managing a current account deficit, the rupee’s volatility, quality of capital inflows, and trade policy.

Key sub-topics

Sub-topic	Core idea
Balance of payments	Current account + capital (financial) account + change in reserves
Exchange rates	Fixed, floating and managed float; India’s managed float since 1993
Foreign capital	FDI (lasting interest) vs FPI (portfolio, 10% threshold)
Convertibility	Full on current account (1994); partial on capital account
Legal frame	FEMA, 1999 replaced FERA, 1973
Trade policy	Foreign Trade Policy, trade remedies, rupee trade settlement

Start with Balance of Payments and Exchange Rates, then revise with the quick revision sheet.