"Massive NRI inflows fail to strengthen rupee amid RBI market operations"
FCNR(B) Deposits
Foreign Currency Non-Resident (Bank) deposits: NRI foreign-currency deposits with Indian banks, exchange-rate risk on principal borne by RBI under swap window.
Managed Float
Exchange-rate regime where the rupee's value is market-determined but the RBI intervenes to limit excessive volatility.
India's exchange rate has operated under a managed float regime since 1993, meaning the rupee's value is primarily determined by market forces of supply and demand for foreign currency, but the Reserve Bank of India (RBI) intervenes periodically to prevent excessive volatility. The legal architecture for all foreign exchange transactions is provided by the Foreign Exchange Management Act (FEMA), 1999, which replaced the more restrictive Foreign Exchange Regulation Act (FERA), 1973 — a philosophical shift from 'control' to 'management' that progressively opened India's capital account.
India's chronic vulnerability to rupee depreciation stems from its structural dependence on crude oil imports, which constitute a large share of the merchandise import bill. When global oil prices rise or the US dollar strengthens — as happens during geopolitical stress — the demand for dollars in India's forex market surges, pushing the rupee down. The RBI's standard toolkit to counter this includes selling dollars from its Foreign Currency Assets (FCA), tightening domestic liquidity, and deploying special capital-attraction instruments. The Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit scheme is one such instrument: it allows non-resident Indians (NRIs) to park foreign currency with Indian banks at attractive interest rates, with the RBI bearing the exchange-rate risk on the principal through a concessional swap window.
The FCNR(B) mechanism was used most famously during the taper-tantrum episode of 2013, when the US Federal Reserve's signals of tapering its bond purchases triggered a global emerging-market selloff. A targeted mobilisation drive then brought in significant dollar inflows and helped the rupee recover sharply — a historical benchmark that shapes expectations every time a similar scheme is deployed.
The FCNR(B) swap window works through a specific channel: Indian banks solicit foreign-currency deposits from NRIs, then transfer those dollars directly to the RBI in exchange for rupees at a concessional swap rate. The RBI, in effect, provides the bank with rupee liquidity while absorbing the currency risk on the principal. This is structurally different from ordinary foreign capital inflows — such as Foreign Portfolio Investment (FPI) in equities or bonds — where dollars enter the open forex market, increase dollar supply, and thereby exert direct downward pressure on the dollar's price (i.e., strengthen the rupee).
Because FCNR(B) dollars bypass the open market and go directly to the RBI, they do not mechanically increase dollar supply in the market. The exchange rate, being determined by open-market supply and demand, is therefore not directly moved by these inflows. …
With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?
Consider the following statements:
1.In India, Non-Banking Financial Companies can avail the Liquidity Adjustment Facility window of the Reserve Bank of India.
2.In India, Foreign Institutional Investors can be holders of the Government Securities (G-Secs).
3.In India, Stock Exchanges can provide a separate trading platform for debts.
Which of the statements given above is/are correct?
With reference to the FCNR(B) concessional swap window, consider the following statements:
1.Dollars deposited by NRIs under this scheme enter the open forex market and directly increase dollar supply.
2.The RBI bears the exchange-rate risk on the principal amount of these deposits.
3.Banks must independently hedge the currency risk on their dollar-denominated interest payments.
Which of the statements given above is/are correct?
Which of the following best explains why the RBI's Foreign Currency Assets (FCA) may not rise proportionally even when large FCNR(B) inflows are reported?
1.Operational lags in banks transferring deposits to the RBI within the weekly reporting cycle.
2.The RBI using new inflows to meet maturing forward dollar obligations.
3.FCNR(B) deposits being counted as part of India's current account surplus.
Select the correct answer using the codes below:
Under India's managed float exchange-rate regime, which of the following RBI interventions allows the central bank to prevent rupee depreciation today without immediately drawing down its spot foreign exchange reserves?
Consider the following assertion and reason:
Assertion (A): Capital-flow instruments such as FCNR(B) deposit schemes are more effective at stabilising the rupee when the depreciation is driven by country-specific stress than when it is driven by global macro factors.
Reason (R): When depreciation is country-specific, restoring investor confidence directly addresses the source of dollar outflows, whereas global factors such as rising oil prices and a strengthening US dollar affect all emerging-market currencies simultaneously.
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