Context
The RBI has defended its decision to close the temporary FCNR(B) swap facility earlier than initially planned, calling it a data-driven calibration rather than a policy reversal. RBI expects its FCNR(B), ECB and overseas foreign-currency borrowing schemes together to attract at least $80 billion.
Explanation
- FCNR(B) – Foreign Currency Non-Resident (Bank) accounts are term deposits maintained by NRIs/PIOs with authorised Indian banks in permitted foreign currencies.
- Since deposits and repayments are in foreign currency, the depositor generally does not bear rupee exchange-rate risk.
- Under an FCNR(B) swap window, banks swap foreign-currency funds with the RBI, transferring currency risk to the central bank for the specified period.
- Such swaps can augment forex liquidity, strengthen the Balance of Payments (BoP) and support foreign-exchange reserves.
- External Commercial Borrowings (ECBs) are commercial loans raised by eligible Indian entities from recognised non-resident lenders.
- Large forex inflows may increase domestic rupee liquidity; RBI can undertake sterilisation to neutralise their monetary impact.
- RBI manages forex under the Foreign Exchange Management Act (FEMA), 1999.
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FCNR(B) Swap Window and Forex Management