SYLLABUS

GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Context: The Reserve Bank of India (RBI) has clarified that there is no proposal to prematurely discontinue the Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit incentive scheme, which will continue until its scheduled expiry on September 30, 2026.

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• The RBI has ruled out any proposal to prematurely withdraw the FCNR(B) deposit incentive scheme, stating that the deposits have "ticked all boxes" and continue to attract robust overseas inflows. 

• As on July 31, 2026, banks mobilised US$40.816 billion under the special window, of which US$36.725 billion came through FCNR(B) deposits, US$2.575 billion through Overseas Foreign Currency Borrowings (OFCBs), and US$1.516 billion through External Commercial Borrowings (ECBs). 

• The concessional US Dollar–Rupee swap facility and temporary regulatory relaxations will remain available for eligible deposits mobilised till September 30, 2026, while the swap facility itself will continue until October 16, 2026. 

Rationale Behind the RBI Measures 

• Attract Stable Foreign Currency Inflows: Encourage Non-Resident Indians (NRIs) to place fresh foreign currency deposits with Indian banks. 

• Support the Rupee: Cushion the rupee against pressures arising from rising global crude oil prices and volatile capital flows. 

• Strengthen the External Sector: Improve India's Balance of Payments (BoP) and augment foreign exchange reserves. 

• Enhance Domestic Liquidity: Provide rupee liquidity through the concessional US Dollar–Rupee swap facility. 

• Facilitate Deposit Mobilisation: Give banks greater flexibility by temporarily relaxing interest rate ceilings and exempting eligible FCNR(B) deposits from CRR and SLR requirements.

About the Foreign Currency Non-Resident (Bank) [FCNR(B)] Deposit Scheme

• The Scheme allows Non-Resident Indians (NRIs) to maintain fixed deposits in designated foreign currencies with authorised Indian banks. 

• Since the deposits are maintained in foreign currency, depositors are protected from exchange rate fluctuations between the Indian rupee and the deposit currency.

• FCNR(B) accounts are governed under FEMA and RBI directions.

• Background:

• Introduced with effect from May 15, 1993, replacing the FCNR(A) Scheme introduced in 1975. 
• Initially, the scheme covered US Dollar, Pound Sterling, Deutsche Mark and Japanese Yen. 
• It was later extended to include Euro (2000) and Canadian Dollar and Australian Dollar (2005). 
• From July 26, 2005, banks were allowed to accept FCNR(B) deposits up to a maximum maturity period of five years, instead of three years. 

• Eligible Currencies

• US Dollar (USD) 
• Pound Sterling (GBP) 
• Euro (EUR) 
• Japanese Yen (JPY) 
• Australian Dollar (AUD) 
• Canadian Dollar (CAD) 

• Special RBI Measures (2026):

• RBI announced a US Dollar–Rupee concessional swap facility, which became operational from June 8, 2026. 
• The facility is available for fresh FCNR(B) deposits mobilised between June 8 and September 30, 2026, while the swap facility will remain operational until October 16, 2026. 
• The RBI temporarily withdrew the interest rate ceiling on fresh FCNR(B) deposits of more than three years and up to five years, and on fresh NRE deposits of three years and above. 
• Eligible FCNR(B) deposits mobilised during the specified period are exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements. 

Significance of the FCNR(B) Scheme

• Protects Depositors from Exchange Rate Risk: Deposits are maintained in foreign currency, shielding NRIs from rupee exchange-rate fluctuations. 

• Mobilises Stable Overseas Savings: Provides Indian banks with a stable source of long-term foreign currency deposits. 

• Strengthens India's External Position: Reinforces foreign exchange reserves and improves resilience to external shocks. 

• Supports Exchange Rate Stability: Helps maintain orderly movement of the rupee during periods of global volatility. 

• Improves Banking Sector Resources: Enables banks to mobilise overseas deposits more efficiently under the special RBI measures.