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
Same topic · past papers
UPSC has asked this before
These previous-year questions sit on the same topic. Open one to practise the earlier ask.
-
2017 · Q77 · General Studies · 2 marks
Which of the following has/have occurred in India after its liberalization of economic policies in 1991? 1. Share of agriculture in GDP increased enormously. 2. Share of India's exports in world trade increased. 3. FDI inflows increased. 4. India's foreign exchange reserves increased enormously. Select the correct answer using the codes given below: -
2017 · Q81 · General Studies · 2 marks
What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)'? 1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. 2. It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its foreign exchange reserves. 3. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future. Select the correct answer using the code given below: -
2026 · Q99 · General Studies · 2 marks
Consider the following statements about the Non-Banking Financial Companies (NBFCs) in India: 1. NBFCs cannot accept demand deposits. 2. All the NBFCs operating in India have to be registered with the RBI. 3. NBFCs form part of the payment and settlement system and can issue cheque drawn on itself. 4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to the depositors of deposit taking NBFCs. Which of the statements given above is/are correct? -
2020 · Q50 · General Studies · 2 marks
If you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be -
2020 · Q70 · General Studies · 2 marks
With reference to the Indian economy, consider the following statements: 1. 'Commercial Paper' is a short-term unsecured promissory note. 2. 'Certificate of Deposit' is a long-term instrument issued by the Reserve Bank of India to a corporation