FCNR(B) Deposits Push Forex Reserves To All-Time High Of $729 Bn In August, Pg3

Key Highlights:

• India's foreign exchange reserves reached an all-time high of $729.33 billion as of August 21.
• This record was primarily driven by the Reserve Bank of India's (RBI) concessional swap window for Foreign Currency Non-Resident (Bank) deposits (FCNR(B)).
• The FCNR(B) swap window, which opened on June 8, attracted $65.4 billion in deposits by August 21.
• The RBI closed the FCNR(B) swap window on August 31, one month ahead of its initial deadline, due to its success.
• The previous record for forex reserves was $728.49 billion on February 27.

India's Forex Reserves.jpg

Detailed Insights:

• The increase in forex reserves provides the RBI with greater capacity to defend the Indian Rupee against volatility and depreciation.
• The Rupee had been under significant pressure due to substantial Foreign Portfolio Investment (FPI) outflows and rising global energy prices.
• The West Asia conflict and the closure of the Strait of Hormuz contributed to higher crude oil prices, increasing India's import bill.
• Under the FCNR(B) scheme, the central bank bears the full exchange rate risk, enabling banks to offer attractive interest rates to Non-Resident Indians (NRIs).
• Other measures introduced on June 5 included the removal of capital gains and withholding taxes on FPI investments in Government Securities (G-Secs).
• Total inflows from the three concessional swap windows (FCNR(B), Overseas Foreign Currency Borrowings, and External Commercial Borrowings) amounted to $72.85 billion by August 21.
• Despite the significant inflows, the Rupee did not appreciate as sharply as it did during a similar FCNR(B) swap window in 2013.

Key Concepts Involved:

• Foreign Currency Non-Resident (Bank) deposits (FCNR(B)): Term deposits held by Non-Resident Indians in foreign currencies, where the exchange rate risk is often absorbed by the central bank.
• Foreign Exchange Reserves: Assets held by a central bank in foreign currencies, used to manage exchange rates, facilitate international transactions, and meet external obligations.
• Rupee Depreciation: A decrease in the value of the Indian Rupee relative to other currencies, making imports more expensive and exports more competitive.
• Foreign Portfolio Investment (FPI): Investments made by foreign entities in financial assets like stocks and bonds in a country, typically for short-term gains.