Why in news
- The Reserve Bank of India’s latest Bulletin highlighted foreign currency inflows driven by the Foreign Currency Non-Resident (Bank) deposit scheme and associated foreign exchange swap facilities.
Key terms
FCNR(B) Account
Foreign currency denominated fixed deposit account maintained by non-residents in authorized Indian banks.
Concessional Forex Swap
A central bank facility providing dollar-rupee exchange at preferential swap costs to encourage foreign capital entry.
Foreign Exchange Risk
The financial risk posed by potential fluctuations in currency exchange rates on open positions.
FEMA, 1999
The primary legislation regulating cross-border trade, capital flows, and foreign currency accounts in India.
What are FCNR(B) Deposits?
- Foreign Currency Non-Resident (Bank) deposits allow Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) to maintain term deposits in permitted foreign currencies.
- They are administered under Foreign Exchange Management Act (FEMA) regulations, with banks carrying foreign exchange risk unless hedged through swap facilities.
Mechanism of RBI Swap Window
- Before: Commercial banks mobilised foreign currency deposits and faced market swap spreads when converting foreign currency into rupees.
- After: The RBI opens a concessional forex swap window, accepting foreign currency from banks for a fixed tenure in exchange for rupees at a pre-determined swap rate, mitigating exchange rate risks for commercial lenders.
Why it matters
- Acts as a targeted monetary tool to augment forex reserves and defend currency stability during external capital outflow pressures.
- Prevents domestic liquidity strain by facilitating smooth conversion of overseas capital into rupee liquidity.
Prelims facts
- FCNR(B) deposits must be maintained in approved foreign currencies, not in Indian Rupees.
- Unlike NRE accounts, exchange rate volatility risk in unhedged FCNR(B) deposits is borne by the deposit-taking bank.
Mains discussion
- Analyze central bank intervention strategies for managing exchange rate volatility during global macroeconomic shifts.
Source: Business Standard
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