$52-Bn In, FCNR(B) Window Closes Early, Pg29

Key Highlights:

• The Reserve Bank of India (RBI) prematurely closed its special forex swap facility for Foreign Currency Non-Resident (Bank) — FCNR(B) — deposits on August 31.
• The facility attracted $52.3 billion through FCNR(B) deposits, contributing to a total of $56.846 billion in foreign currency inflows.
• The RBI introduced the facility on June 8 to encourage foreign capital inflows, strengthen the rupee, and improve foreign exchange reserves.
• The schemes for External Commercial Borrowings (ECBs) and Overseas Foreign Currency Borrowings (OFCBs) will remain open until December 31, 2026.

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Detailed Insights:

• The special US dollar-rupee forex swap facility allowed banks to mobilize fresh three-to-five-year FCNR(B) deposits.
• The RBI absorbed the entire hedging cost for banks by offering a concessional swap rate, making these deposits more attractive.
• This intervention lowered the cost of hedging foreign currency deposits, enabling banks to offer competitive rates to non-resident depositors.
• Non-resident Indians and Persons of Indian Origin are eligible to open FCNR(B) deposits, which are fully repatriable and tax-exempt in India.
• The RBI also temporarily withdrew the interest rate ceiling on fresh FCNR(B) deposits of three-to-five-year tenors until September 30.
• The measure was primarily intended as a liquidity and stability measure rather than a driver of sharp currency appreciation or reserve accumulation.

Key Concepts Involved:

• Foreign Currency Non-Resident (Bank) — FCNR(B) — deposits: Bank accounts in India held by Non-Resident Indians (NRIs) in foreign currency, fully repatriable and tax-exempt.
• Forex Swap Facility: An arrangement where the central bank exchanges foreign currency for local currency with commercial banks at a pre-determined rate, often to manage liquidity or exchange rate stability.
• External Commercial Borrowings (ECBs): Loans raised by eligible resident entities from recognized non-resident entities, used for various purposes as per RBI guidelines.
• Overseas Foreign Currency Borrowings (OFCBs): Borrowings by Indian banks from overseas branches or correspondents in foreign currency.