Differentiate between debt-creating and non-debt-creating capital flows in India's Balance of Payments. Examine their respective implications for external sector stability.

Capital account flows in India's Balance of Payments are classified by whether they create a fixed repayment obligation. The RBI's special USD-INR swap facility of June 2026 for FCNR(B) deposits, ECBs and Overseas Foreign Currency Borrowings [1] — which drew an unprecedented surge of inflows — has revived the question of how far debt-based inflows can substitute for durable equity capital.

Basis of differentiation

• Repayment obligation: debt-creating flows — external commercial borrowings, NRI deposits (FCNR(B), NRE), short-term trade credit, multilateral/bilateral loans, FPI in debt — carry contracted repayment of principal with interest. Non-debt-creating flows — FDI and FPI in equity — yield returns only through profits or dividends, contingent on performance.
• Entry in external debt stock: commercial borrowings and NRI deposits are the two largest components of India's external debt [2]; equity inflows are excluded.
• Risk incidence: FCNR(B) deposits are foreign-currency denominated, so exchange risk sits with the recipient bank; in FDI it sits with the investor.

Implications of debt-creating flows

• Offer speed and calibration — a swap window can be opened and closed by the regulator, as the FCNR(B) window was in 2026 [1], quickly augmenting reserves and RBI's intervention capacity.
• But they enlarge the external debt stock, debt-service ratio and rollover risk, and NRI deposits are sensitive to interest-rate arbitrage, making them reversible under stress.

Implications of non-debt-creating flows

• FDI supplies non-debt financial resources plus technology and employment, strengthening the external sector without repayment liability [3].
• FPI equity, though non-debt, is volatile "hot money" — hence adequacy buffers matter; reserves covered roughly 90% of external debt in late 2024 [3].

Thus, debt-creating flows are a stabilisation tool, not a substitute for durable capital. A prudent path lies in using swap windows tactically while deepening FDI through the Economic Survey's "getting FDI right" agenda and correcting structural current-account pressures — securing external resilience alongside sustainable growth.