Why RBI is returning to a terrible idea to boost foreign inflows: the FCNR(B) swap scheme

📌 Summary:

• The government/RBI is considering reviving the FCNR(B) deposit swap scheme, last used in 2013 to defend the rupee during the US Fed "taper tantrum"
• FCNR(B) deposits are fixed-term foreign-currency deposits for NRIs/PIOs/OCIs, letting them park earnings abroad without converting to rupees
• Under a swap, RBI absorbs the exchange-rate risk and offers banks a subsidy (3.5% in 2013), letting them offer attractive rates; the 2013 scheme drew a record $26 billion and restored confidence in the rupee
• Then-Governor Raghuram Rajan called it "idiotic" yet it succeeded; the move now comes alongside removal of capital-gains tax on FII investments in government bonds to attract foreign inflows and support the rupee/BoP

🎯 UPSC Relevance: GS3 — external sector, balance of payments, RBI tools to manage currency volatility and capital flows

📝 Prelims Facts:

• FCNR(B) = Foreign Currency Non-Resident (Bank) deposit; held in freely convertible foreign currency
• 2013 swap scheme drew ~$26 billion; 3.5% subsidy then; eligible: NRIs, PIOs, OCIs

🔑 Key Term: FCNR(B) swap — RBI takes on the forex risk of banks' foreign-currency deposits, incentivising inflows to stabilise the rupee and balance of payments