FCNR(B) turns litmus test | Explainer
The Reserve Bank of India has revived the FCNR(B) deposit scheme to attract foreign currency inflows and stabilize the rupee amid geopolitical volatility. This strategy aims to mobilize long-term resources from the diaspora to offset declining foreign direct investment and portfolio outflows.
Why it matters
The success of this financial instrument is critical for India's macroeconomic stability and its ability to manage external debt in a fragmented global economy.
Reserve Bank of India (RBI). File | Photo Credit: Reuters
Foreign currency non-resident (Bank) or FCNR(B) deposits, which were introduced in 1993, will prove to be a litmus test for the country’s ability to mobilise long-term foreign currency resources from its vast global diaspora.
At a time of geopolitical fragmentation, volatile capital flows and uncertain interest-rate cycles (as inflation risks persist) that are redefining international finance, these instruments have become a strategic macroeconomic rupee stabilisation tool, but at the risk of increasing external liabilities.
The Reserve Bank of India (RBI) revived the FCNR(B) concessional swap window, last used when Dr. Raghuram Rajan was the Governor, to strengthen foreign exchange (forex) reserves, helping defend the rupee, which has depreciated 12% year-on-year (July 22) vis-a-vis the U.S. Greenback, reflecting the elevated geopolitical risks, stronger dollar, higher import dependence and recently negative foreign direct investments (FDI).
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