"RBI Liberalises Foreign Investment Rules to Strengthen Rupee"
FCNR(B) Deposit
Foreign-currency term deposit by NRIs; bank bears the exchange-rate risk, not the depositor.
NRE Deposit
Rupee-denominated, fully repatriable NRI account; principal and interest exempt from Indian income tax.
India's exchange rate has operated under a managed float regime since 1993, with the legal framework for foreign exchange transactions governed by the Foreign Exchange Management Act (FEMA), 1999, which replaced the more restrictive Foreign Exchange Regulation Act (FERA), 1973. This philosophical shift — from control to management — opened the door for progressive capital-account liberalisation. The Reserve Bank of India manages the rupee's external value through a combination of open-market operations in the forex market, interest-rate signalling via the Monetary Policy Committee (MPC), and targeted instruments such as Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and External Commercial Borrowings (ECBs).
India's chronic current-account vulnerability stems from its heavy dependence on crude oil imports, which constitute a large share of the import bill. When global oil prices rise or the dollar strengthens, the rupee faces sustained depreciation pressure. Historically, the RBI has responded with a toolkit that includes selling dollars from its foreign exchange reserves, tightening liquidity, and — during acute stress episodes — deploying special deposit schemes to attract diaspora and foreign capital. The FCNR(B) scheme has been used as a stabilisation instrument before, most notably during the taper-tantrum episode of 2013, when a targeted mobilisation effort brought in significant dollar inflows and helped stabilise the currency.
The government securities (G-Sec) market has long been a structural weak point in India's capital markets. With commercial banks, insurers, and the RBI collectively holding nearly 75% of outstanding government securities, the market lacks the depth and liquidity that global institutional investors require. This captive-investor structure keeps sovereign yields higher than they need to be and limits India's integration into global bond indices — a gateway to sustained, large-scale institutional inflows.
The FCNR(B) deposit is a term deposit held in foreign currency by non-resident Indians (NRIs) and overseas citizens in Indian banks. Banks bear the exchange-rate risk, while depositors earn returns in their chosen foreign currency. The NRE (Non-Resident External) deposit, by contrast, is a rupee-denominated account that is fully repatriable — both principal and interest — and is exempt from Indian income tax. By temporarily relaxing the interest-rate ceiling on fresh FCNR(B) and NRE deposits, the RBI enables banks to offer more competitive returns relative to global benchmarks, exploiting interest-rate differentials between India and advanced economies to attract inflows.
The concessional forex swap facility offered alongside these deposits allows banks to hedge their currency exposure at a subsidised rate, reducing the cost of mobilising foreign-currency funds. External Commercial Borrowings (ECBs) are loans raised by Indian entities from foreign lenders; easing their conditions (as part of this package) allows Indian corporates and banks to access cheaper overseas capital, reducing pressure on domestic credit markets. …
Which one of the following is not the most likely measure the Government/Reserve Bank of India takes to stop the slide of Indian rupee?
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?
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.
With reference to Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits in India, which of the following statements is/are correct?
1.The depositor bears the exchange-rate risk on these deposits.
2.These deposits are denominated in foreign currency.
3.The RBI can relax interest-rate ceilings on these deposits to attract foreign capital during periods of currency stress.
Select the correct answer using the code given below:
Consider the following statements regarding the exemption of Foreign Institutional Investors (FIIs) from income tax on Government Securities (G-Secs) in India:
1.This reform removes a withholding tax that had previously discouraged overseas participation in India's sovereign debt market.
2.It is expected to strengthen India's case for inclusion in major global bond indices.
3.It primarily benefits domestic retail investors by improving liquidity.
Which of the statements given above are correct?
Assertion (A): India's government securities market has historically lacked global depth and liquidity.
Reason (R): Commercial banks, insurers, and the RBI together hold a dominant share of India's outstanding government securities, limiting participation by diverse global investors.
Which of the following is correct?
Which of the following measures would NOT be consistent with the RBI's objective of arresting a rapid depreciation of the Indian rupee?
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