Examine the significance of NRI deposit schemes like FCNR(B) in stabilising India's external sector during periods of currency volatility.

Q. Examine the significance of NRI deposit schemes like FCNR(B) in stabilising India's external sector during periods of currency volatility. (15 marks, 250-350 words)

FCNR(B) — Foreign Currency Non-Resident (Bank) — deposits are foreign-currency-denominated term deposits placed by NRIs with Indian banks. Paired with RBI swap windows, they have repeatedly functioned as a fast-acting, countercyclical buffer for India's external sector, though they are a supplement to sound fundamentals, not a substitute.

How they stabilise the external sector - Direct forex supply: inflows arrive in foreign currency, augmenting reserves and easing rupee pressure; the RBI's swap window absorbs the currency risk by covering the principal of the deposit [4]. - Sticky, non-volatile capital: unlike portfolio flows, eligible FCNR(B) deposits carry a minimum three-year maturity with a lock-in, insulating the capital account from sudden reversals [3]. - Diaspora-linked resilience: NRI deposits recorded a net inflow of US$3.3 billion in Q4:2025-26, higher than a year earlier [5], holding up even when other flows weaken.

Evidence from volatility episodes - 2013 Taper Tantrum: the rupee depreciated about 19.4% between May and August 2013 and the RBI sold a net US$10.8 billion in spot [2]; the special swap window at a concessional 3.5% rate for fresh deposits mobilised after 6 September 2013 restored confidence [3]. - 2026 facility: the par/concessional swap for fresh FCNR(B), ECB and OFCB inflows, operationalised 8 June 2026, drew US$40.8 billion by 31 July 2026, of which FCNR(B) alone contributed US$36.7 billion [1] — used pre-emptively to strengthen the BoP rather than to firefight, aided by Finance Ministry outreach to bank CEOs [6].

Limits to their significance - They are debt, not equity — adding to external liabilities and future repayment obligations. - Concessional swaps transfer exchange risk to the RBI's balance sheet [4]. - Bunched redemptions at maturity can revive outflow pressure.

Thus NRI deposits are best seen as a rapid stabilising instrument that buys time for adjustment. Deployed selectively alongside a competitive export base, stable FDI and adequate reserves, they can strengthen India's balance of payments and advance the resilient, self-reliant external sector that macroeconomic stability demands.

(~315 words)

Sources: 1. RBI Press Release, "Forex Inflows under the Swap Facility for FCNR(B) Deposits, ECBs and OFCBs" (August 1, 2026) — announcement (5 June 2026), operationalisation (8 June 2026), window validity, and inflows of US$40,816 mn till 31 July 2026 (FCNR(B) US$36,725 mn) 2. RBI Bulletin, December 2018 — article on exchange rate volatility and RBI intervention — 19.4% rupee depreciation May–August 2013 and net US$10.8 bn spot sales 3. RBI FAQs — Swap Window for attracting FCNR(B) Dollar funds (2013) — concessional 3.5% swap rate, deposits mobilised after 6 September 2013, minimum three-year maturity with lock-in 4. RBI FAQs — Swap Facility for FCNR(B) Deposits, External Commercial Borrowings and Overseas Foreign Currency Borrowings (2026) — swap covers only the principal amount; RBI bears the exchange risk 5. RBI Press Release — Developments in India's Balance of Payments, Q4:2025-26 — NRI deposits net inflow of US$3.3 bn in Q4:2025-26 6. PIB — Union Finance Minister interacts with Bank MDs and CEOs on FCNR(B), ECB and OFCB swap initiatives — government-level outreach supporting mobilisation