Context
- The RBI has operationalised a Special Foreign Currency Swap Facility to mobilise foreign exchange through FCNR(B) deposits, ECBs, and OFCBs.
- The facility has attracted over US$20 billion, boosting India’s forex reserves and external sector stability.
What is RBI’s Special Swap Facility?
- It is a temporary liquidity window introduced by the RBI to encourage banks to raise foreign currency from overseas.
- Banks mobilise foreign currency through specified sources and swap it with the RBI for rupees at a concessional swap rate.
Objective
- Increase foreign exchange inflows, strengthen forex reserves, improve balance of payments (BoP), and stabilise the rupee during periods of external uncertainty.
Sources of Foreign Currency under the Swap Facility
1. FCNR(B) Deposits (Foreign Currency Non-Resident Bank Deposits)
- Who can open? Non-Resident Indians (NRIs) with authorised Indian banks.
- Deposit Currency: Maintained in designated foreign currencies (e.g., US Dollar, Euro, Pound Sterling, Japanese Yen).
- Exchange Rate Protection: Both the principal and interest are repaid in the same foreign currency, protecting depositors from exchange rate fluctuations.
- Repatriation: Both principal and interest are fully repatriable, allowing NRIs to transfer funds abroad without restrictions.
2. External Commercial Borrowings (ECBs)
- Meaning: Foreign currency loans raised by eligible Indian companies from overseas lenders.
- Purpose: Used for capital expenditure, infrastructure projects, manufacturing, and business expansion, subject to RBI guidelines.
- Lenders: International banks, foreign financial institutions, export credit agencies, and other recognised overseas lenders.
- Regulation: Governed by the RBI’s External Commercial Borrowing (ECB) Framework.
3. Overseas Foreign Currency Borrowings (OFCBs)
- Meaning: Foreign currency borrowings raised by Indian banks from overseas financial markets.
- Purpose: Helps banks mobilise additional foreign currency resources to meet domestic funding requirements.
- Significance: Increases the availability of foreign exchange in the banking system and supports the RBI’s efforts to strengthen forex reserves and liquidity under the special swap facility.
About Foreign Currency Swap
A currency swap is an agreement in which two parties exchange one currency for another and agree to reverse the transaction at a future date at predetermined terms.
In this case:
- Banks bring foreign currency (e.g., US dollars) to RBI.
- RBI provides equivalent rupee liquidity.
- At maturity, the transaction is reversed as per agreed conditions.
FCNR(B) vs NRE vs NRO Accounts
| Feature | FCNR(B)Foreign (Currency Non-Resident (Bank) Account) | NRE(Non-Resident External Account) | NRO(Non-Resident Ordinary Account) |
| Who can open? | NRIs/PIOs | NRIs/PIOs | NRIs/PIOs |
| Deposit Currency | Foreign Currency | Indian Rupee (INR) | Indian Rupee (INR) |
| Source of Funds | Foreign earnings remitted from abroad | Foreign earnings remitted from abroad | Income earned in India (rent, pension, dividend, etc.) and foreign remittances |
| Exchange Rate Risk | No (Deposit and repayment in same foreign currency) | Yes | Yes |
| Repatriation | Fully repatriable | Fully repatriable | Repatriation is restricted (subject to RBI rules and limits) |
| Interest | Paid in foreign currency | Paid in INR | Paid in INR |
| Used For | Holding savings in foreign currency without exchange rate risk | Maintaining overseas income in India | Managing income generated in India |
Q. With reference to the Foreign Currency Non-Resident (Bank) [FCNR(B)] Account, consider the following statements:
1. FCNR(B) deposits are maintained in Indian Rupees and are repaid in Indian Rupees.
2. Both the principal and interest are repaid in the same foreign currency, protecting the depositor from exchange rate risk.
3. FCNR(B) accounts can be opened by any resident Indian citizen.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer: (b) 2 only
Explanation
Statement 1 is Incorrect. FCNR(B) deposits are maintained in designated foreign currencies, not in Indian Rupees.
Statement 2 is Correct. The principal and interest are repaid in the same foreign currency, eliminating exchange rate risk for the depositor.
Statement 3 is Incorrect. FCNR(B) accounts can be opened only by Non-Resident Indians (NRIs)/Persons of Indian Origin (PIOs) (as per eligibility rules), not by resident Indian citizens.