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Subject: RBIXLiquidity Management

  • RBI faces liquidity deluge as surplus climbs to 4-yr high of Rs 10.3 lakh crore

    Why in the News

    Banking system liquidity has climbed to a four-year high of about Rs 10.3 lakh crore on 3 September, its highest level since May 2022. The surplus is the direct product of the Reserve Bank of India’s (RBI) special US dollar-rupee forex swap facility, which drew foreign exchange inflows of $136.377 billion through 31 August. The RBI has closed that window ahead of schedule, leaving the swap usable only until 11 September. The tension is that an instrument run to defend the currency has produced a rupee overhang large enough to push overnight rates down at a moment when the Monetary Policy Committee expects headline inflation to peak. The central bank must now drain the surplus without triggering a sharp rise in interest rates or unsettling the government securities market.

    How does the special dollar-rupee swap window work?

    1. The transaction: Banks sell dollars to the RBI against rupees today, with an agreed reverse leg at a fixed future date, so the RBI takes the foreign exchange and releases rupees into the system.
    2. Where the dollars came from: Banks raised them by mobilising Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, which accounted for $127.226 billion of the total mobilisation.
    3. The concession that made it attractive: The deposits were exempted from the Cash Reserve Ratio (the share of deposits a bank must park with the RBI) and the Statutory Liquidity Ratio (the share it must hold in specified securities), so the rupees released landed unencumbered.
    4. The window’s closure: The deposit scheme ended on 31 August, and banks may use the dollar swap facility only until 11 September.

    How large is the surplus, and how fast did it build?

    1. The record: The liquidity surplus in the banking system hit a fresh record on 3 September, surpassing the previous high of Rs 9.7 lakh crore set a day earlier.
    2. The pace of the build-up: The daily average surplus stood at Rs 3.67 lakh crore in August, more than three times July’s Rs 1.07 lakh crore.
    3. The second source: Liquidity released through the RBI’s own foreign exchange operations added to the swap inflows, leaving a large pool of rupee funds chasing limited avenues for deployment.

    Who raised the money?

    1. Private banks took the largest share: Private sector lenders netted $61 billion, or 46.9 per cent of the $130 billion counted to 3 September.
    2. Public sector banks came second: State-owned lenders raised $37 billion, a 28.5 per cent share.
    3. Foreign banks took the remainder: Foreign lenders picked up $32 billion, or 24.6 per cent.
    4. The tally is provisional: The final figure is likely to run higher once the data is fully captured.

    Why is a surplus a problem for the central bank?

    1. It drags the operating rate down: A large surplus puts downward pressure on the overnight money-market rate, including the repo rate, unless the RBI actively absorbs it.
    2. It works against the inflation stance: Cheap overnight money can push inflation levels up, at a time when members of the Monetary Policy Committee have indicated that headline inflation is projected to peak as high as 5.9 per cent in Q3 2026-27 and that a case for a rate hike may emerge.
    3. It runs against the global direction: Global central banks are keeping rates high or tightening cautiously, because inflation from energy and geopolitical shocks remains above target even as growth weakens.
    4. The absorption itself carries risk: Draining the excess cannot be done in a way that triggers a sharp rise in interest rates or unsettles the government securities market.

    What is the RBI doing about it?

    1. It shut the window early: The swap scheme was stopped ahead of schedule. An official position two weeks earlier had stated there was no intention to do so.
    2. It is absorbing through auctions: A 30-day variable rate reverse repo of Rs 7 lakh crore was announced on 4 September, an auction in which the RBI borrows surplus funds from banks for a fixed term at a market-determined rate.
    3. A reserve requirement change is under discussion: Near-term options include a temporary Cash Reserve Ratio hike or the Incremental Cash Reserve Ratio first used in 2023.
    4. One tool may not suffice: The assessment on record is that mopping up the surplus is a challenge and that the RBI may have to employ a range of liquidity absorption tools rather than one.

    What could deepen or offset the surplus?

    1. The projected peak: CareEdge Ratings expects core liquidity to rise from Rs 8.1 lakh crore as of mid-August to closer to Rs 13-14 lakh crore by December-end in the absence of liquidity management operations.
    2. Festive currency demand pulls the other way: Currency in circulation could rise by around Rs 1.1 lakh crore from June levels by December during the festive season.
    3. The forward book drains more: Maturing RBI short positions in the forwards market create an additional drag of around Rs 3 lakh crore, against a short-forward book maturing of $22 billion in three months.
    4. Reserve accretion adds a smaller drain: Cash Reserve Ratio accretion on deposit growth should reduce core liquidity by a further Rs 70,000 crore.

    What does the surplus do to bank funding?

    1. Money market rates are already falling: Interest rates on certificates of deposit are declining as banks holding the new deposits stay away from bulk borrowings.
    2. Large banks have saved on funding: The bigger banks are estimated to have saved about 25 to 60 basis points in incremental cost of deposits in August as they shed bulk funds.
    3. The benefit spreads unevenly: Smaller banks and non-banking financial companies gain through cheaper money market funding, and the surplus itself is not evenly distributed among lenders.

    Challenges to the special swap window

    1. The inflow is debt and it matures: The deposits are repayable, so this year’s balance of payments gain converts into an outflow when they come due. Eg. Repayments begin in 2029, against a short forward book of $200 billion already lined up.
      The Fix: Build the repayment schedule into the reserve adequacy target and stagger maturities through a partial rollover window opened well before 2029.
    2. Reversing the reserve exemption carries a credibility cost: Imposing a cash reserve requirement on deposits raised on an explicit exemption unwinds the term on which banks accepted the scheme. Eg. A temporary or incremental reserve ratio hike is among the absorption tools under discussion.
      The Fix: Exhaust longer tenor auction absorption before touching the exemption, and announce any change with a fixed sunset date.
    3. The mobilisation is concentrated in a few balance sheets: Nearly half the money sits with private lenders, so both the funding advantage and the eventual repayment risk are clustered. Eg. Smaller lenders gain only indirectly, through cheaper money market rates.
      The Fix: Require bank-wise disclosure of the swap position and its maturity profile in the regulatory returns.
    4. The scheme substitutes for structural inflows: A one-off deposit window fills the external account in a year when nothing has changed to attract durable foreign investment. Eg. A flight to safety in global markets would leave India unable to raise incremental inflows at any price.
      The Fix: Keep a standing, smaller swap facility open through the cycle, so mobilisation is not bunched into a single crisis window.

    Conclusion

    The RBI has ended one problem by creating its mirror image, and the currency defence now sits on the wrong side of the inflation mandate. The immediate marker is the outcome of the term absorption auctions and whether the reserve ratio is touched before the festive season drains currency out of the system on its own. The larger question opens at the far end of the deposit tenor, when the money raised in this window has to be sent back out. Every absorption tool used until then buys time rather than closing the external gap the window was opened to cover.

    Back2Basics: Foreign Currency Non-Resident (Bank) deposit

    1. What it is: A term deposit held with an Indian bank by a non-resident Indian or a person of Indian origin, denominated in a permitted foreign currency rather than in rupees.
    2. Who carries the exchange risk: Principal and interest are repayable in the same foreign currency, so the depositor bears no rupee depreciation risk and the bank or the central bank carries it.
    3. Tenor: Deposits are accepted for terms of one year to five years.
    4. Regulation: The RBI sets ceilings on the interest rate banks may offer, fixed against a reference benchmark rate for the currency concerned.

    Matching Previous Year Question

    “[2010] When the Reserve Bank of India announces an increase of the Cash Reserve Ratio, what does it mean? (a) The commercial banks will have less money to lend (b) The Reserve Bank of India will have less money to lend (c) The Union government will have less money to lend (d) The commercial banks will have more money to lend (a)”

  • On interest rates, can’t be both dovish & hawkish

    Why in the News

    The Monetary Policy Committee of the Reserve Bank of India (RBI) voted unanimously at its last meeting to hold the benchmark repo rate at 5.25 per cent, in a policy read as more dovish than expected. The minutes of that same meeting, released a few days ago, point the other way. Members drawn from the central bank displayed a distinct hawkishness, and the Bank’s own inflation projections imply negative real interest rates on a forward basis. The divergence is the problem: a stance described as neutral cannot be reconciled with projections that would stimulate activity, nor with a growth assessment the Bank itself calls resilient.

    What is a monetary policy stance?

    1. What it signals: The stance states the direction of the committee’s next expected move on the policy rate. That signal is separate from the rate set on the day.
    2. Accommodative: The committee signals that the next move is a cut, or that liquidity will stay supportive of demand.
    3. Neutral: The committee commits to no direction and keeps both a cut and a hike open at the following meeting.
    4. Tightening or withdrawal of accommodation: The committee signals that the next move is a hike, or the removal of surplus liquidity from the system.

    What is the real interest rate?

    1. Definition: The real interest rate is the nominal policy rate less expected inflation, so it measures what a lender actually earns once prices have risen.
    2. Why the sign matters: A negative real rate makes money cheaper than the rate at which prices are rising, which pushes households and firms toward borrowing and spending.

    What did the last policy decision signal?

    1. The stance retained: The committee kept the stance neutral alongside that hold.
    2. The tone: The policy read as more dovish than many analysts had expected at the time.
    3. The inference drawn: Analysts concluded that rate hikes were not imminent, even with inflation projected above target.

    How do the minutes of the same meeting read differently?

    1. A reversal in signal: The minutes suggest the current situation is unlikely to be maintained over the near term, and the divergence from the policy statement is striking.
    2. The internal members hardened: That hawkishness came from the members drawn from the central bank, not from the committee as a whole.
    3. How far each went: An assessment by economists at the State Bank of India reads the Governor’s minutes statement as showing an inclination toward policy tightening, records a Deputy Governor calling for a possible rate hike later in the year, and notes an Executive Director stopping just short of the same call.
    4. A different objection from outside: External members of the committee drew attention instead to the real interest rate.

    Can a neutral stance sit with negative real interest rates?

    1. The projections: The Bank has pegged inflation at 5.9 per cent in the third quarter, 5.5 per cent in the fourth quarter, and 5.3 per cent in the first quarter of the next financial year.
    2. What they imply: Against a repo rate of 5.25 per cent, those projections put real interest rates in negative territory on a forward basis.
    3. What negative real rates do: They stimulate economic activity, which is a different setting from the stance the committee has adopted.
    4. What neutral is supposed to mean: The Governor has previously stated that a neutral stance implies no support for economic activity and no support for controlling inflation.
    5. The growth assessment compounds it: The Bank describes growth as resilient, supported by domestic demand, sustained expansion in manufacturing and services activity, and robust exports, which removes the case for a stimulative real rate.

    What does the same uncertainty look like at other central banks?

    1. A shared condition: Central banks across the world are grappling with uncertainty over inflation and over the course of monetary policy.
    2. The United States: The Federal Reserve maintained interest rates in July, and the path of policy after that remains unclear.
    3. The same gap between decision and minutes: The minutes of that Federal Reserve meeting record that several participants favoured an increase of 25 basis points in the target range.

    What will decide the next move?

    1. The October meeting: By the time the committee meets next in October, there should be more clarity on agriculture and on the trajectory of inflation.
    2. The projections as the signal: The Bank’s revised inflation projections will show what it expects of underlying price pressures going forward.
    3. The consequence: Those expectations are what would produce an adjustment in the policy rate.

    Challenges to India’s flexible inflation targeting framework

    1. A headline target moved by food: Food and beverages carry close to half the weight in the Consumer Price Index, so the target responds to harvests that no policy rate can influence. Eg. Vegetable price spikes pushed headline inflation above the upper tolerance band in 2023 and 2024. Core inflation stayed subdued through the same period. Fix. Publish an explicit core inflation reference alongside the headline target, so the committee’s tolerance for supply shocks is visible in advance.
    2. An ageing consumption basket: The index in use rests on a consumption pattern captured years ago, so the measured basket drifts from what households actually buy. Eg. Services such as data, health insurance and education are underweighted relative to current household spending. Fix. Fix a statutory revision cycle for the index base year so the measure and the target are reset together.
    3. Exchange rate pressure competes with the target: Rate decisions taken for domestic prices collide with the management of capital flows. Eg. Record foreign portfolio outflows in 2025-26 forced heavy intervention to steady the rupee. Fix. State an explicit order of priority between the inflation target and exchange rate smoothing in the policy statement.
    4. No fiscal counterpart to the target: The framework binds the central bank alone, with no matching commitment on borrowing. Eg. Heavy government borrowing keeps longer tenor yields elevated regardless of where the repo rate is set. Fix. Pair each five year target reset with a stated debt to gross domestic product path under the Fiscal Responsibility and Budget Management Act, 2003.
    5. Accountability stops at a report: A sustained breach obliges a report and nothing further. Eg. The report on a target breach goes to the Central Government and is not laid before Parliament. Fix. Require the report to be tabled in Parliament with a stated corrective path and a review date.

    Conclusion

    A unanimous hold read as dovish now sits alongside minutes that record internal calls for tightening and projections that imply negative real rates. The policy statement, the stance and the projections are describing three different settings, and only one of them can be the policy. The October meeting, with clearer information on agriculture and on the inflation trajectory, is where that inconsistency has to be resolved into either a rate move or a change of stance.

    “[2023] Consider the following statements :

    Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.

    Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.

    Which one of the following is correct in respect of the above statements?

    (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

    (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

    (c) Statement-I is correct but Statement-II is incorrect

    (d) Statement-I is incorrect but Statement-II is correct

  • RBI’s Dollar Inflows Keep India’s Bond Yields Under Control

    Why in News?

    India’s 10-year government bond yield rose only 8 basis points in six months, compared with much larger increases in major advanced and emerging economies. The RBI relied more on foreign exchange and liquidity management than policy-rate hikes.

    Key Concepts

    1. FCNR(B) Deposits

    • FCNR(B) = Foreign Currency Non-Resident (Bank) deposits.
    • Term deposits held by NRIs in permitted foreign currencies.
    • Principal and interest are repaid in the same foreign currency, protecting depositors from exchange-rate risk.
    • Banks can bring these foreign currency funds into India and swap them with the RBI.
    • This increases forex reserves and rupee liquidity.
    • It is a borrowed inflow with fixed maturity, not permanent capital.

    2. 10-Year Benchmark Bond Yield

    • Return earned on the most actively traded 10-year government security.
    • Bond price and yield move inversely:
      • Bond price ↓ → Yield ↑
      • Bond price ↑ → Yield ↓
    • It influences pricing of corporate bonds and long-term loans.
    • 1 basis point = 0.01 percentage point.

    3. RBI’s Policy Corridor

    The overnight money-market rate operates within a corridor around the repo rate.

    • MSF → Upper ceiling; banks borrow from RBI.
    • SDF → Lower floor; banks park surplus funds with RBI.
    • The corridor is 25 basis points on either side of the repo rate.

    4. Certificate of Deposit

    • A short-tenor negotiable money-market instrument issued by banks to raise funds.
    • Rising CD issuance can indicate credit growth exceeding deposit growth.
    • Falling issuance suggests deposits are sufficient to finance lending.

    5. Bloomberg Global Aggregate Index

    • A global benchmark bond index tracked by passive funds.
    • Inclusion of Indian government bonds would lead index-tracking funds to purchase Indian bonds.
    • India’s inclusion was deferred, postponing potential index-driven inflows.

    What Did the RBI Do?

    • Instead of aggressively raising the policy rate, the RBI used targeted measures to attract foreign currency:
      • FCNR(B) deposits
      • External Commercial Borrowings
      • Overseas foreign-currency borrowings
    • These measures attracted about $56.8 billion between 8 June and 13 August, with $52.3 billion through FCNR(B).

    Impact on Banking Liquidity

    • Overnight rates moved below the repo rate towards the SDF floor.
    • Deposits increased.
    • Banks relied less on market borrowing.
    • Certificate of Deposit issuance declined.
    • Banking-system surplus liquidity increased.

    “[2022] With reference to the Indian economy, consider the following statements:
    1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
    2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
    3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
    Which of the statements given above are correct?
    (a) 1 and 2 only
    (b) 2 and 3 only
    (c) 1 and 3 only
    (d) 1, 2 and 3

  • India paid $15 bn of imports in rupees in March-May

    Why in News?

    RBI data shows a sharp rise in rupee-denominated import payments, driven mainly by increased Russian crude oil purchases.

    Key Highlights

    • India settled imports worth ₹1.38 lakh crore (about $14.6 billion) in rupees during March-May 2026, accounting for 7.1% of merchandise imports.
    • This is a sharp increase from ₹42,506 crore (2.4% of imports) in December 2025-February 2026.
    • Russian crude imports reached $17.13 billion, up 30% YoY, aided by temporary US sanctions waivers.
    • Rupee-settled imports have steadily increased:
      • 2023-24: ₹99,680 crore
      • 2024-25: ₹1.13 lakh crore
      • 2025-26: ₹1.72 lakh crore
    • India’s merchandise trade deficit stood at $119 billion in 2025-26.
    • Benefits of Rupee Trade Settlement:
      • Reduces dependence on the US dollar.
      • Saves foreign exchange reserves.
      • Lowers exchange rate risk and transaction costs.
      • Promotes internationalisation of the Indian rupee.
    • Challenges:
      • Limited acceptance of the rupee by trading partners.
      • Persistent trade deficits reduce the recycling of rupee balances.

    Rupee Trade Settlement Mechanism (2022)

    • Introduced by the RBI in July 2022.
    • Enables invoicing, payment, and settlement of international trade in Indian rupees through Special Rupee Vostro Accounts (SRVAs).
    • Aims to facilitate trade, reduce dollar dependence, and strengthen the rupee’s global use.

    PYQ (2015, GS3, 12.5 Marks) Craze for gold in Indians have led to a surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization Scheme.

    [2022] With reference to the Indian economy, consider the following statements:
    1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
    2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
    3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
    Which of the above statements are correct?

    [A] 1 and 2 only

    [B] 1 and 2 only

    [C] 1 and 3 only

    [D] 1, 2 and 3

  • Is FCNR(B) a litmus test for diaspora deposits?

    Why in the News?

    The Reserve Bank of India (RBI) has revived the Foreign Currency Non-Resident (Bank) [FCNR(B)] concessional swap window, last used when Raghuram Rajan was Governor, to defend a rupee that has depreciated 12% year-on-year against the U.S. dollar. The move comes as Foreign Portfolio Investors (FPIs) withdrew ₹2.87 lakh crore from Indian equities between January and the first week of June 2026, already surpassing the ₹1.66 lakh crore pulled out in all of 2025.

    What is Foreign Currency Non-Resident (Bank) [FCNR(B)] account and its concessional swap window?

    1. Definition: It is a fixed-term deposit account for Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) that keeps funds in foreign currencies like USD, GBP, EUR, JPY, AUD, or CAD with tax-free interest and full repatriation.
    2. No Exchange Risk: Funds stay in the original foreign currency from deposit to maturity, protecting from rupee value changes.
    3. The FCNR(B) concessional swap window: It is a special Reserve Bank of India (RBI) facility that allows Indian banks to swap long-term foreign currency NRI deposits at a heavily discounted hedging cost, helping boost India’s foreign exchange inflows.

    What has the RBI designed to attract diaspora capital, and how has the market responded?

    1. Concessional swap facility: The RBI is offering banks a swap facility for FCNR(B) deposits with maturities of three to five years, cutting the cost of hedging foreign currency exposure by around 3% against prevailing FX swap rates of 2.8%-3.3% for that tenor.
    2. Deposit window: The scheme covers fresh FCNR(B) deposits mobilised until September 30, 2026, and targets $50-70 billion in inflows.
    3. Higher returns for depositors: Most large banks are offering around 6%, and some smaller or private banks up to 7.1%, under the swap window, compared with 4%-4.4% on U.S. Treasuries.
    4. Response so far: Total foreign currency mobilisation under the scheme has reached $20.72 billion, of which $17.4 billion (84%) has come through FCNR(B) deposits alone.
    5. Currencies covered: Deposits are maintained in the U.S. Dollar, Pound Sterling, Euro, Japanese Yen, Australian Dollar, and Canadian Dollar, with both principal and interest denominated in foreign currency.

    Why has this window become necessary now?

    1. Rupee under pressure: The rupee has depreciated 12% year-on-year against the U.S. dollar as of July 22, reflecting elevated geopolitical risk, a stronger dollar, higher import dependence and recently negative Foreign Direct Investment (FDI).
    2. FCNR(B) inflows had collapsed: Net FCNR(B) inflows fell to $946 million in FY26 from $7.1 billion in FY25, a decline of nearly 86%, before the swap window revived them.
    3. FPI outflows outpacing prior years: Foreign Portfolio Investors (FPIs) withdrew ₹2.87 lakh crore from Indian equities between January and the first week of June 2026, already exceeding the entire ₹1.66 lakh crore withdrawn in 2025.
    4. Unwinding forward positions: Reuters reported on July 22 that the RBI has likely used part of the initial inflows to unwind a portion of its forex forward book. (A forex forward book is the total record of all outstanding forward foreign exchange contracts held by an institution, such as the Reserve Bank of India on Reuters or a commercial bank, representing future agreements to buy or sell currencies at preset rates. It shows whether the entity holds more commitments to buy (long) or sell (short) a specific foreign currency like the U.S. dollar)

    Does this mark a return to crisis-driven fundraising, or a shift to strength-based buffer-building?

    1. Earlier crisis episodes: Resurgent India Bonds (1998) followed the Pokhran-II sanctions, India Millennium Deposits (2000) followed the post-Pokhran sanctions and the dotcom bust, and the first FCNR(B) drive (2013) raised about $34 billion from the diaspora during the “taper tantrum.”
    2. Current fundamentals differ: India’s forex reserves exceed $650 billion, there is no Balance of Payments (BoP) crisis, and the country retains investment-grade macroeconomic fundamentals.
    3. Stated aim now is buffer-building: The RBI’s objective is to build additional buffers against geopolitical uncertainty and volatile capital flows, not resolve an emergency.
    4. Liability trade-off remains: FCNR(B) deposits still add to India’s external liabilities even though they carry no exchange-rate risk for depositors.

    What precondition could undermine the scheme’s sustainability?

    1. Dependence on West Asia: West Asia accounts for nearly 50% of India’s inward remittances, which totalled about $129 billion in 2024, the world’s largest, according to the World Bank.
    2. Remittance growth moderating: Growth from Gulf countries has moderated as governments pursue labour nationalisation policies, oil-price volatility affects fiscal spending, and hiring of expatriate workers slows in some sectors.
    3. Competing Gulf deposit rates: Banks in Gulf countries are offering competitive dollar deposit rates amid war risk and digital-rival competition, making it harder for Indian lenders to compete.
    4. Crowding-out concerns: The RBI and the UAE Central Bank have reportedly held talks on concerns that Indian banks’ dollar deposit drive is crowding out UAE banks.
    5. Access gap for smaller banks: Small and mid-sized private banks without overseas branches or a GIFT City presence are exploring tie-ups with larger Indian banks that have a GIFT City presence.

    Conclusion

    The FCNR(B) revival shows India can mobilise diaspora capital from a position of macroeconomic strength, with forex reserves above $650 billion and no Balance of Payments (BoP) crisis, unlike the crisis-driven 1998 and 2013 fundraising drives. Its success is conditional on a precondition now under strain: continued remittance growth from a West Asia destabilised by war, oil-price volatility and labour nationalisation, even as the deposits themselves add to India’s external liabilities.

    PYQ Relevance

    [UPSC 2016] Justify the need for FDI for the development of the Indian economy. Why is there a gap between MOUs signed and actual FDIs? Suggest remedial steps to increase actual FDI in India.

    Linkage: The PYQ examines India’s external capital mobilisation strategy and the role of foreign capital in sustaining macroeconomic stability and economic growth. The FCNR(B) article extends this theme from equity capital (FDI/FPI) to diaspora debt capital. It analyses how the RBI uses FCNR(B) deposits to cushion FPI outflows, stabilise the rupee, augment forex reserves and strengthen external-sector resilience, while highlighting the trade-off of rising external liabilities.

  • RBI Plans Trial of Polymer (Plastic) Currency Notes

    Why in News?

    The Reserve Bank of India (RBI) is set to begin field trials of polymer (plastic) currency notes, nearly 15 years after an earlier pilot was proposed but not implemented. An RBI subsidiary has invited bids to procure polymer sheets for printing trial notes.

    Why Polymer Notes?

    • More durable: Last 2 to 6 times longer than cotton-based paper notes.
    • Lower long-term costs: Fewer notes need to be printed, transported, and destroyed.
    • Environment-friendly: Worn-out polymer notes can be recycled into plastic products.
    • Better security: More resistant to counterfeiting due to advanced security features.

    India’s Earlier Attempt

    • In 2009, RBI proposed a pilot of ₹10 polymer notes.
    • Field trials were planned in Kochi, Mysuru, Shimla, Jaipur, and Bhubaneswar.
    • The project was shelved after technical issues were identified during evaluation.

    Global Adoption

    • First introduced by Australia (1988).
    • Used in 50+ countries, including the UK, Canada, New Zealand, Singapore, Malaysia, Thailand, and Vietnam.

    Challenges

    • India may initially need to import polymer sheets, creating import dependence.
    • Transition requires fresh investment despite existing domestic facilities for banknote paper and security ink.
    • RBI is therefore expected to adopt a gradual transition.

    Prelims Value Added

    • Indian currency notes are currently made from 100% cotton-based paper.
    • Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (BRBNMPL) is a wholly owned subsidiary of the Reserve Bank of India that prints banknotes.
    • Bank Note Paper Mill India Pvt. Ltd. (BNPMIPL) manufactures banknote paper domestically.
    • Security Printing and Minting Corporation of India Ltd. (SPMCIL) prints banknotes, mints coins, and produces security documents.

    [2025] Which of the following are the sources of income for the Reserve Bank of India?
    I. Buying and selling Government bonds
    II. Buying and selling foreign currency
    III. Pension fund management
    IV. Lending to private companies
    V. Printing and distributing currency notes
    Select the correct answer using the code given below.

    [A] I and II only

    [B] II, III and IV

    [C] I, III, IV and V

    [D] I, II and V

  • Consider the following statements

    Consider the following statements:
    1. An increase in the rate of interest may lead to an increase in the rate of inflation.
    2. An increase in the rate of interest may lead to a decrease in the level of investment.
    3. An increase in the rate of interest may lead to an increase in the rate of savings.
    Which of the statements given above is/are correct?

  • With reference to the Indian economy, consider the following statements

    With reference to the Indian economy, consider the following statements :
    1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
    2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
    3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

    Which of the statements given above are correct?

  • Consider the following statements

    Consider the following statements :
    Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
    Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
    Which one of the following is correct in respect of the above statements?

  • RBI Temporarily Lifts Interest Rate Ceiling on FCNR(B) & NRE Deposits

    Why in the news?

    The RBI has temporarily removed the interest rate ceiling on fresh FCNR(B) deposits (3-5 years) and NRE deposits (3 years and above) from 17 June 2026 to 30 September 2026 to attract foreign currency inflows, support the rupee, and ease external financing conditions.

    FCNR(B) Deposits

    • Foreign Currency Non-Resident (Bank) Deposits allow NRIs to maintain fixed deposits in designated foreign currencies.
    • Principal and interest are protected from exchange-rate risk.
    • RBI has removed the interest rate cap on fresh and renewed deposits of 3-5 year tenor.
    • Banks have already increased FCNR(B) deposit rates to around 7%.

    NRE Deposits

    • Non-Resident External (NRE) Accounts are rupee-denominated accounts maintained by NRIs.
    • Both principal and interest are fully repatriable.
    • Interest rate ceiling on fresh and renewed deposits of 3 years and above has been removed temporarily.
    • Transfers from NRO to NRE accounts will not qualify for this relaxation.

    RBI’s Objective

    • Attract larger NRI deposits and foreign currency inflows.
    • Strengthen foreign exchange reserves.
    • Support rupee stability.
    • Reduce overseas borrowing costs for banks and public sector entities.
    • Complement RBI’s concessional forex swap facility announced on 5 June 2026.

    Expected Impact

    • Analysts estimate $30-50 billion of inflows by Q3 FY27.
    • Similar FCNR(B) scheme in 2013 attracted nearly $25 billion.
    • Increased foreign currency liquidity may ease external sector pressures.

    [2021] Consider the following:
    1. Foreign currency convertible bonds
    2. Foreign institutional investment with certain conditions
    3. Global depository receipts
    4. Non-resident external deposits
    Which of the above can be included in Foreign Direct Investments?

    [A] 1, 2 and 3

    [B] 3 only

    [C] 2 and 4

    [D] 1 and 4