I recently encountered this diacritic ( ॅ) outside the course when learning new Hindi words (specifically, the words कॉपी and कॉफ़ी. Both loanwords so I'm guessing that's probably part of it?). I was wondering if anyone here knew what this diacritic was and how to pronounce it.
You've correctly guessed that it is something to do with loanwords. The vowel ऑ (and its diacritic ॉ) is not present in standard Hindi and is used to represent the 'o' vowel sound in English loanwords such as 'doctor', 'copy', 'coffee' etc. However, note that since it is not a vowel sound native to their language, some Hindi speakers tend to pronounce it as औ, which is the vowel sound present in English words such as 'dog' and 'or'.
To further complicate things, some regional dialects use a diphthong pronunciation for औ so the vowel which is represented by औ in standard Hindi is also written using ऑ (mainly in loanwords).
No, it is used when writing English words in Hindi without translating. I am a native.