KOCHI: When the Reserve Bank of India (RBI) last unveiled a special FCNR(B) swap facility in 2013, India was battling one of the gravest external sector crises in its recent history.
The US Federal Reserve's indication that it would begin tapering its massive bond-buying programme triggered a wave of capital flight from emerging markets. India, then grouped among the so-called "Fragile Five" economies, was particularly vulnerable.
The country's current account deficit had widened to nearly 4.8 per cent of GDP, foreign exchange reserves stood at around $275-290 billion and the rupee tumbled from around Rs54.40 against the US dollar in early May 2013 to nearly Rs68.85 by late August - a depreciation of roughly 26 per cent in less than four months.
Faced with intense pressure on the currency, the RBI chose an unconventional route. Instead of relying solely on its foreign exchange reserves to defend the rupee, it introduced a special concessional swap facility for banks mobilising Foreign Currency Non-Resident (Bank), or FCNR(B), deposits from non-resident Indians.
2013's swap facility
The scheme proved remarkably successful. Banks mobilised more than US$34 billion under the programme, strengthening India's foreign exchange reserves and helping restore confidence in the rupee.
Thirteen years later, the RBI has once again opened a special FCNR(B) mobilisation window. The similarities, however, appear to end there.
India today presents a very different macroeconomic picture. Foreign exchange reserves have more than doubled since 2013 and remain among the largest in the world. The current account position is considerably stronger than it was during the taper tantrum, the banking system is more resilient and the RBI has acquired far greater experience in managing episodes of currency volatility.
Yet the central bank has chosen to revive a policy instrument that had remained dormant for more than a decade.
That naturally raises an important policy question.
What has changed sufficiently to warrant the revival of a tool that was designed for one of India's most severe currency stress episodes?
What prompted the move?
The decision inevitably raises a question. If the external sector remains comfortable and foreign exchange reserves are among the world's largest, what prompted the RBI to dust off an instrument that was last deployed during the 2013 'taper tantrum.
The more relevant question is whether the present global environment posed risks significant enough to justify the RBI bearing part of the hedging cost through a special swap window.
The answer is not straightforward.
The world economy is again passing through an unusually uncertain phase. Persistent dollar strength, volatile portfolio flows, geopolitical tensions and shifting global capital movements have complicated exchange rate management for emerging market central banks. From that perspective, the RBI's decision could be viewed as a precautionary step aimed at strengthening foreign currency inflows before market conditions deteriorate.
At the same time, the policy is not without cost.
The special swap facility effectively reduces the hedging cost for banks mobilising FCNR(B) deposits. In return, the RBI gains access to additional foreign currency inflows that strengthen the country's external position.
Banks benefit from lower hedging costs. NRIs receive an attractive avenue for deploying dollar savings. If the resulting inflows help moderate currency volatility and reduce imported inflation, the wider economy benefits as well.
The central issue, therefore, is not whether one participant benefits more than another.
Rather, it is whether the economic benefits generated by the scheme justify the cost incurred by the central bank in facilitating those inflows.
Challenge today is different
That question deserves serious examination because the circumstances surrounding the two FCNR(B) initiatives are markedly different.
In 2013, the urgency was visible. A sharply weakening rupee, rapidly deteriorating investor confidence and relatively modest foreign exchange reserves demanded an immediate response. The economic rationale for extraordinary intervention was self-evident.
The challenge today is different.
India is entering this phase from a position of considerably greater strength. That does not eliminate external risks. It does, however, raise a legitimate question about the threshold at which a central bank should deploy an instrument that carries an economic cost.
The RBI may well have compelling reasons. It may be seeking to preserve reserves rather than expend them, diversify sources of dollar inflows, reassure markets or build an additional buffer against future global uncertainty.
Equally, the revival of the FCNR(B) window invites a broader debate on the evolving philosophy of central banking.
Should extraordinary policy instruments be activated only when markets are already under severe stress? Or is it preferable to deploy them early, when vulnerabilities are still manageable and confidence remains intact?
The answer will shape not only how the current FCNR(B) initiative is judged but also how the RBI's evolving approach to managing India's external sector is understood in the years ahead.
