Subject: RBIXLiquidity Management

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.