{"id":371609,"date":"2026-09-11T21:05:45","date_gmt":"2026-09-11T15:35:45","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=371609"},"modified":"2026-09-11T21:05:45","modified_gmt":"2026-09-11T15:35:45","slug":"fcnrb-benefits-outweigh-costs","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/fcnrb-benefits-outweigh-costs\/","title":{"rendered":"FCNR(B): Benefits outweigh costs"},"content":{"rendered":"

Source:<\/strong> The post \u201cFCNR(B): Benefits outweigh costs\u201d <\/strong>has been created based on “FCNR(B): Benefits outweigh costs\u201d<\/strong> published in \u201cBusiness Line\u201d on 11th September 2026.<\/p>\n

UPSC Syllabus: <\/strong>GS-3-Economy<\/p>\n

Context<\/strong>: The Foreign Currency Non-Resident (FCNR-B) scheme<\/strong> was used by the RBI to attract foreign currency deposits at concessional swap rates and strengthen India\u2019s external position. The concessional swap window operated from June 8 to August 31, 2026<\/strong>, and mobilised $127.2 billion in just 85 days<\/strong>.<\/p>\n

Benefits of the FCNR(B) Swap Window<\/strong><\/h2>\n
    \n
  1. Attracted foreign capital at a large scale: <\/strong>The scheme mobilised $127.2 billion, thereby strengthening foreign capital inflows and the balance of payments.<\/li>\n
  2. Generated a net surplus for RBI: <\/strong>With average forward premia of 2.93% for three-year<\/strong> and 3.23% for five-year<\/strong> tenors, against average US Treasury yields of 4.23% and 4.33%<\/strong>, respectively, investment returns exceeded hedging costs.<\/li>\n
  3. Created a positive balance-sheet impact: <\/strong>Under the assumed deposit distribution of 40% in three-year, 10% in four-year and 50% in five-year tenors<\/strong>, the estimated hedging cost was $16.3 billion<\/strong>, while investment income was $22.4 billion<\/strong>, generating a net surplus of $6.1 billion (\u20b958,372 crore)<\/strong>.<\/li>\n
  4. Provided banking-system liquidity: <\/strong>The concessional swaps injected nearly \u20b912 trillion<\/strong> of rupee liquidity into the banking system, helping banks overcome elevated credit-deposit (C-D) ratio constraints<\/strong> and supporting productive-sector lending.<\/li>\n
  5. Reduced government borrowing costs: <\/strong>Surplus liquidity encouraged banks to invest in government securities, pushing yields lower and thereby reducing the government’s borrowing costs.<\/li>\n
  6. Strengthened external stability: <\/strong>Despite foreign capital inflows of around $136 billion<\/strong>, including FCNR, ECB and OFCB inflows, reserves increased from $681.6 billion to $740.8 billion<\/strong> between June 5 and August 28, indicating the strengthening of India’s forex position.<\/li>\n<\/ol>\n

    Costs and Challenges<\/strong><\/h2>\n
      \n
    1. High forward-premium costs: <\/strong>USD\/INR forward premia touched more than 1,500 basis points for five-year tenors<\/strong>, raising concerns regarding the cost of the scheme.<\/li>\n
    2. Surplus liquidity: <\/strong>Durable surplus liquidity reached \u20b98.06 lakh crore<\/strong> by mid-August, pushing overnight rates below the repo rate, with call money at 4.95% and TREPS at 4.45%<\/strong>.<\/li>\n
    3. Sterilisation burden: <\/strong>RBI had to undertake sterilisation operations to keep liquidity within its comfort zone of 0.5\u20131% of NDTL<\/strong>, creating an additional cost.<\/li>\n
    4. Temporary liquidity-management challenge: <\/strong>RBI’s short dollar forward position is above $100 billion<\/strong>, with around $40 billion maturing within one year<\/strong>. Their unwinding will automatically contract rupee liquidity.<\/li>\n
    5. Seasonal liquidity pressures: <\/strong>September and October are likely to witness liquidity absorption due to festive-season withdrawals, advance tax payments, credit growth, revival of capex, government borrowing and import payments ahead of Diwali<\/strong>.<\/li>\n<\/ol>\n

      Why the Costs Remain Manageable<\/strong><\/h2>\n
        \n
      1. Even if RBI sterilises liquidity for up to one year, the estimated costs remain manageable.\n
          \n
        1. With surplus liquidity of \u20b93\u20138 trillion<\/strong> and sterilisation rates of 5.3\u20135.7%<\/strong>, quarterly sterilisation costs could be around \u20b93,975\u201310,600 crore<\/strong>, while annual costs could range from \u20b917,000\u201345,600 crore<\/strong>.<\/li>\n
        2. Against the FCNR(B) surplus of \u20b958,372 crore<\/strong>, RBI could still retain a net positive balance of approximately \u20b912,772\u201354,397 crore<\/strong>.<\/li>\n<\/ol>\n<\/li>\n
        3. RBI can manage liquidity through incremental CRR hikes, longer-term VRRRs and OMOs<\/strong>, instead of relying on permanent sterilisation mechanisms such as RBI should use CRR, VRRRs and OMOs flexibly to manage surplus liquidity without imposing excessive sterilisation costs.<\/li>\n
        4. RBI should gradually unwind its forward dollar positions<\/strong> to absorb excess rupee liquidity in an orderly manner.<\/li>\n
        5. Future FCNR(B)-type interventions<\/strong> should be undertaken after carefully assessing their costs, returns and impact on liquidity.<\/li>\n
        6. RBI should coordinate liquidity management<\/strong> with seasonal factors, credit demand, government borrowing and import payments.\n
            \n
          1. Banks should channel surplus liquidity towards productive-sector lending rather than excessive investment in government securities.<\/li>\n<\/ol>\n<\/li>\n
          2. RBI should maintain adequate forex reserves and exchange-rate stability<\/strong> while avoiding excessive market intervention.<\/li>\n
          3. Overall, monetary policy should balance external stability, liquidity management and economic growth while keeping sterilisation costs under control the Market Stabilisation Scheme (MSS)<\/strong>.<\/li>\n<\/ol>\n

            Way Forward<\/strong><\/h2>\n
              \n
            1. RBI should use CRR, VRRRs and OMOs flexibly to manage surplus liquidity without imposing excessive sterilisation costs.<\/li>\n
            2. RBI should gradually unwind its forward dollar positions to absorb excess rupee liquidity in an orderly manner.<\/li>\n
            3. Future FCNR(B)-type interventions should be undertaken after carefully assessing their costs, returns and impact on liquidity.<\/li>\n
            4. RBI should coordinate liquidity management with seasonal factors, credit demand, government borrowing and import payments.<\/li>\n
            5. Banks should channel surplus liquidity towards productive-sector lending rather than excessive investment in government securities.<\/li>\n
            6. RBI should maintain adequate forex reserves and exchange-rate stability while avoiding excessive market intervention.<\/li>\n
            7. Overall, monetary policy should balance external stability, liquidity management and economic growth while keeping sterilisation costs under control.<\/li>\n<\/ol>\n

              Conclusion: <\/strong>The FCNR(B) swap window has broadly achieved its objectives of attracting foreign capital, strengthening the balance of payments, providing banking-system liquidity and lowering government borrowing costs<\/strong>. Although forward-premium and sterilisation costs are significant, they are temporary and manageable<\/strong> compared with the estimated surplus and wider macroeconomic benefits. Therefore, the FCNR(B) intervention can be viewed as a net-positive and prudent measure for financial stability<\/strong>, particularly amid global liquidity tightening and volatile capital flows.<\/p>\n

              Question: <\/strong>The FCNR(B) swap window has been presented as a measure that strengthened India\u2019s external position while creating manageable liquidity and sterilisation costs. Discuss.<\/p>\n

              Source: <\/strong>Business Line<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

              Source: The post \u201cFCNR(B): Benefits outweigh costs\u201d has been created based on “FCNR(B): Benefits outweigh costs\u201d published in \u201cBusiness Line\u201d on 11th September 2026. UPSC Syllabus: GS-3-Economy Context: The Foreign Currency Non-Resident (FCNR-B) scheme was used by the RBI to attract foreign currency deposits at concessional swap rates and strengthen India\u2019s external position. The concessional… Continue reading FCNR(B): Benefits outweigh costs<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230],"tags":[12044,216,8184],"class_list":["post-371609","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","tag-business-line","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/371609","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=371609"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/371609\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=371609"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=371609"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=371609"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}