"FCNR(B) Swap Window Raises Questions on Rupee Stability and Hidden Risks"
FCNR(B) Deposits
Foreign Currency Non-Resident (Banks) deposits; NRIs park foreign currency with Indian banks, free of rupee risk, with full repatriation.
Carry Trade
borrowing in a low-interest currency and investing in a high-yield currency to profit from the interest differential.
India's external-sector management has historically rested on two pillars: building foreign exchange reserves through current-account surpluses and attracting durable capital inflows such as Foreign Direct Investment (FDI). When these organic sources prove insufficient — as during episodes of global risk-off sentiment, commodity price shocks, or domestic growth slowdowns — the Reserve Bank of India (RBI) has periodically deployed special instruments to attract diaspora capital. The most prominent of these is the Foreign Currency Non-Resident (Banks) [FCNR(B)] deposit scheme, which allows non-resident Indians to park foreign currency with Indian banks for fixed tenors, free of exchange-rate risk and with full repatriation rights. The scheme has been activated in crisis-adjacent moments before — most notably in 2013, when the rupee fell sharply amid the US Federal Reserve's taper tantrum, and the RBI mobilised roughly $34 billion through a similar FCNR(B) swap window to stabilise the currency.
The balance of payments (BoP) framework is the conceptual lens through which such interventions must be understood. A country's BoP comprises the current account (trade in goods and services, remittances, income flows) and the capital/financial account (FDI, portfolio investment, external borrowing). When the current account is in deficit — meaning the country spends more on imports than it earns from exports — it must be financed by capital-account surpluses. If those surpluses are durable (FDI, long-term bonds), the financing is stable. If they are volatile (portfolio flows, short-term borrowing), the country remains exposed to sudden reversals. FCNR(B) deposits occupy an intermediate position: they are time-bound liabilities with a fixed maturity, not equity, and they create future repayment obligations.
The FCNR(B) swap facility works through a specific mechanism. Indian banks solicit fresh foreign-currency deposits from non-resident Indians, typically at tenors of three to five years. They then swap these dollars with the RBI at a concessional rate, meaning the RBI absorbs the hedging cost — the cost of insuring against currency movement over the deposit's life. Because the RBI subsidises this cost, banks can offer depositors interest rates of 6–7.5% on dollar deposits, which is substantially above what a depositor could earn in developed-market bank accounts. Some banks further amplify returns by offering leverage of 9–19 times, effectively turning the scheme into a structured carry trade: borrow cheaply abroad, place funds at a protected high yield in India, with the currency risk borne by the public balance sheet.
This risk-relocation is the scheme's central analytical feature. The rupee's exchange-rate risk does not disappear — it migrates. When the RBI absorbs hedging costs, the exposure appears on the RBI's balance sheet (and by extension, the sovereign's). …
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?
Consider the following statements:
The effect of devaluation of a currency is that it necessarily
1.improves the competitiveness of the domestic exports in the foreign markets
2.increases the foreign value of domestic currency
3.improves the trade balance
Which of the above statements is/are correct?
Convertibility of rupee implies
Consider the following statements with respect to the digital rupee:
1.It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.
2.It appears as a liability on the RBI's balance sheet.
3.It is insured against inflation by its very design.
4.It is freely convertible against commercial bank money and cash.
Which of the statements given above are correct?
With reference to the FCNR(B) swap facility used by the RBI to stabilise the rupee, consider the following statements:
1.Under the facility, the RBI absorbs the hedging cost, allowing banks to offer higher dollar deposit rates to non-resident depositors.
2.FCNR(B) deposits are equity instruments and do not create repayment obligations for Indian banks.
3.The facility relocates currency risk from the market to the RBI's balance sheet rather than eliminating it.
4.FCNR(B) deposits are freely convertible against rupee at any time during the deposit tenor.
Which of the statements given above are correct?
The term 'asset-liability mismatch' in the context of banking refers to which of the following?
Assertion (A): The FCNR(B) swap window can stabilise the rupee in the short term without addressing India's structural current account vulnerabilities.
Reason (R): FCNR(B) deposits are a form of external borrowing that create future repayment obligations and relocate, rather than eliminate, currency risk.
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