What instruments does RBI use to influence capital account flows? Discuss with reference to recent measures.

Q. What instruments does RBI use to influence capital account flows? Discuss with reference to recent measures. (15 marks, 250-350 words)

India's capital account is not managed by outright controls alone. Under the Foreign Exchange Management Act, 1999, the RBI works through a graded toolkit that alters the price, quantity and hedging cost of foreign capital. Recent measures — notably the June 2026 concessional swap facility — show this toolkit being used pre-emptively rather than as crisis firefighting.

Instruments in RBI's capital-account toolkit - Regulatory (quantity) levers: the ECB framework — eligible borrowers, all-in-cost ceilings, minimum average maturity, end-use restrictions — calibrates how much foreign debt corporates may raise [1]. - Price levers on NRI deposits: interest-rate ceilings on FCNR(B)/NRE deposits are relaxed or freed to make Indian bank deposits attractive; banks may offer differential rates [2]. - Swap windows: concessional buy/sell dollar-rupee swaps with Authorised Dealer banks cut the hedging cost of foreign funds, effectively subsidising inflows [2]. - Forex market operations: spot and forward intervention plus reserve management to smooth volatility. - Operational easing: permitting loans/SBLCs against eligible deposits and lien-marking, which improves bank appetite to mobilise them [2].

Recent measure: the 2026 concessional swap facility - Announced 5 June 2026 and operationalised 8 June 2026, covering fresh FCNR(B) deposits, ECBs and OFCBs; a plain swap covering principal only, not interest [2]. - Window validity is staggered — FCNR(B) till 30 September 2026, ECB/OFCB till 31 December 2026 [2]. - It mobilised USD 40.8 billion till 31 July 2026 — FCNR(B) USD 36.7 bn, OFCBs USD 2.6 bn, ECBs USD 1.5 bn — nearly double the USD 20.7 billion recorded on 17 July [3].

Assessment - It revives the 2013 post-Taper Tantrum swap window, but as a proactive balance-of-payments measure rather than a defensive one [4]. - Caveat: such inflows are dated debt liabilities, creating rollover obligations at maturity.

RBI thus influences capital flows chiefly by repricing risk rather than restricting entry. Sustained external resilience will still depend on durable equity flows and export competitiveness, with swap windows serving as a timely bridge to macro-stability.

(~320 words)

Sources: 1. RBI Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations — ECB framework under FEMA, 1999; eligible borrowers, all-in-cost, maturity norms 2. RBI FAQs: Swap Facility for FCNR(B) deposits, External Commercial Borrowings and Overseas Foreign Currency Borrowings — scheme design, announcement/operationalisation dates, window validity, principal-only swap, differential rates, loans/lien against deposits 3. RBI Press Release, August 1, 2026 — Forex inflows under the swap facility — USD 40.816 bn till 31 July 2026 and instrument-wise break-up 4. RBI FAQs: Swap Window for attracting FCNR(B) Dollar Funds (2013) — the 2013 post-Taper Tantrum precedent