India banks can lend against FCNR(B) deposits, says RBI
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims·
Why in news
The RBI clarified that Indian banks can now lend against FCNR(B) deposits and issue Standby Letters of Credit to attract $50 billion in foreign capital.
Background
The Reserve Bank of India (RBI) permitted banks to extend loans to non-resident account holders using FCNR(B) deposits. This move is designed to mobilize an additional $50 billion in foreign capital into the Indian market.
Facts for Prelims
- BodyRBI: The central bank of India responsible for monetary policy and banking regulation
- FactTarget: Mobilize an additional $50 billion in foreign capital into Indian markets
- FactFCNR(B): Foreign Currency Non-Resident (Bank) deposits held in foreign currency
- S&TStandby Letters of Credit: A guarantee provided by a bank to a seller that the buyer's payment will be covered if the buyer defaults
For Mains
Q. Discuss how the expansion of FCNR(B) deposit facilities can bolster India's external sector and the role of the RBI in managing capital inflows.
Dimensions to cover in your answer
- Liquidity management: Balancing the influx of foreign capital with the need to prevent excessive currency volatility
- Credit risk exposure: Assessing the risk profile of lending against non-resident deposits in a fluctuating global interest rate environment
- Capital account liberalization: The trade-off between attracting foreign investment and maintaining macroeconomic stability
Keywords: Capital Account · Liquidity Management · Foreign Exchange Reserves · Monetary Policy · Credit Risk
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