Mains Practice Questions for the Day
- Q. RBI’s special FCNR(B) deposit facility can support foreign capital inflows, but its success depends on interest rate competitiveness and external sector confidence. Discuss.
- Q. India’s nuclear modernisation reflects the changing nature of strategic security in South Asia. Discuss with reference to SIPRI Yearbook 2026.
Q. RBI’s special FCNR(B) deposit facility can support foreign capital inflows, but its success depends on interest rate competitiveness and external sector confidence. Discuss.
(GS Paper III – Indian Economy, External Sector, Banking, Monetary Policy, Capital Flows, Balance of Payments)
Introduction:
The Reserve Bank of India has allowed banks to mobilise fresh three- to five-year FCNR(B) deposits till September 2026 and swap them with the RBI at concessional terms. This move aims to attract NRI dollar deposits, improve foreign currency liquidity and support India’s external sector. However, its success depends not only on regulatory support but also on whether Indian banks offer competitive interest rates and whether NRIs have confidence in India’s macroeconomic stability.
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What are FCNR(B) Deposits?
- FCNR(B) means Foreign Currency Non-Resident (Bank) deposits.
- These are fixed-term deposits maintained by NRIs, OCIs and PIOs in foreign currencies such as the US dollar, pound sterling, euro, yen, Australian dollar and Canadian dollar.
- Unlike NRE and NRO accounts, FCNR(B) deposits are not held in Indian rupees.
- Interest earned on FCNR(B) deposits is generally exempt from income tax in India if the depositor is a non-resident under Indian tax laws.
How RBI’s Facility Can Support Foreign Inflows
- The RBI has allowed banks to swap eligible FCNR(B) deposits with it at concessional terms.
- This reduces the hedging cost for banks.
- Banks are also exempted from maintaining CRR and SLR on these deposits.
- This makes FCNR(B) deposits a cheaper source of foreign currency funding for banks.
- Higher FCNR(B) inflows can strengthen foreign exchange reserves, improve dollar liquidity and help reduce pressure on the rupee.
- It can also support banking sector liquidity and provide resources for lending.
Why Interest Rate Competitiveness Matters
- Global dollar deposit rates remain attractive, with many overseas deposits offering returns above 4%.
- Indian banks currently offer relatively lower FCNR(B) rates, generally around 3% to 3.65% for longer tenures.
- If Indian banks do not offer a meaningful premium, NRIs may prefer keeping funds in foreign banks.
- FCNR(B) inflows fell sharply by 86% in FY26, from $7.1 billion in FY25 to $946 million in FY26.
- This shows that regulatory relaxation alone may not attract large inflows unless deposit rates are competitive.
Role of External Sector Confidence
- NRIs also consider India’s broader economic stability before shifting funds.
- Confidence depends on:
- Stable rupee movement
- Comfortable foreign exchange reserves
- Low external debt vulnerability
- Strong remittance inflows
- Policy credibility of RBI
- Stable inflation and growth outlook
- If external conditions are uncertain, NRIs may avoid longer-term deposits despite higher rates.
Concerns
- Higher FCNR(B) rates may increase banks’ cost of funds.
- Excessive dependence on NRI deposits can create vulnerability if global interest rates change.
- Short-term inflow management cannot replace long-term external strength.
- Foreign currency liabilities must be carefully managed to avoid exchange rate and maturity risks.
Way Forward
- Banks should offer competitive but prudent FCNR(B) interest rates.
- RBI must monitor foreign currency risk and maturity mismatches.
- India should strengthen long-term inflows through exports, FDI, remittances and stable capital flows.
- External sector management should combine RBI support with macroeconomic stability.
Conclusion:
The RBI’s special FCNR(B) facility is a useful instrument to attract NRI dollar inflows and support external stability. However, its success will depend on competitive interest rates, depositor confidence, rupee stability and prudent risk management. A balanced approach can help India attract foreign capital without creating new financial vulnerabilities.
Q. India’s nuclear modernisation reflects the changing nature of strategic security in South Asia. Discuss with reference to SIPRI Yearbook 2026.
(GS Paper III – Defence, Internal Security, Cyber Warfare, Nuclear Deterrence, Science and Technology.)
Introduction:
India’s nuclear modernisation is shaped by a changing security environment involving China, Pakistan, cyber warfare, long-range missile systems and global nuclear modernisation. The SIPRI Yearbook 2026 estimated India’s nuclear arsenal at around 190 warheads by early 2026 and noted that India is increasingly focusing on longer-range nuclear delivery systems capable of reaching targets across China.
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Changing Nature of Strategic Security
- Earlier, India’s nuclear posture was largely Pakistan-focused, due to repeated conflicts and cross-border security threats.
- Now, India’s strategic planning has widened because of the China factor.
- China’s larger nuclear stockpile, missile modernisation and military assertiveness have made long-range deterrence more important for India.
- India’s modernisation therefore reflects a shift from a narrow regional deterrence approach to a broader two-front nuclear security framework.
India’s Nuclear Modernisation
- SIPRI notes that India is developing longer-range delivery systems.
- This supports India’s policy of credible minimum deterrence.
- India’s nuclear arsenal is not meant for aggressive expansion but for maintaining deterrence against nuclear threats.
- India’s official doctrine includes:
- No First Use
- Credible Minimum Deterrence
- Massive Retaliation
- Civilian political control through Nuclear Command Authority
India-Pakistan Dimension
- SIPRI described the May 2025 India-Pakistan confrontation, known as Operation Sindoor, as an unusually severe crisis between two nuclear-armed neighbours.
- The crisis showed that conventional military conflict can quickly acquire a nuclear shadow in South Asia.
- It also highlighted the importance of:
- Crisis communication
- Escalation control
- Responsible nuclear behaviour
- Strong command and control systems
Cyber and Multi-Domain Warfare
- SIPRI observed that India and Pakistan integrated cyber operations into active military conflict during the 2025 crisis.
- This shows that modern strategic security is no longer limited to nuclear weapons alone.
- Future conflicts may include:
- Conventional strikes
- Cyber attacks
- Drone warfare
- Space-based surveillance
- Information warfare
- Nuclear deterrence
- Therefore, nuclear security must now be supported by cyber security, space capability and resilient communication systems.
Global Nuclear Context
- SIPRI stated that all nine nuclear-armed states continued modernising their nuclear arsenals.
- The nine nuclear-armed countries possessed around 12,187 nuclear warheads at the start of 2026.
- Around 9,745 warheads were in military stockpiles for potential use.
- This shows that the global movement towards nuclear disarmament is slowing.
Challenges for India
- Nuclear modernisation may increase arms race concerns in South Asia.
- India faces simultaneous pressure from China and Pakistan.
- Cyber operations may increase the risk of miscalculation during crises.
- India remains the second-largest arms importer during 2021–25, which affects strategic autonomy.
- Rising defence expenditure must be balanced with development needs.
Way Forward
- Maintain India’s doctrine of credible minimum deterrence.
- Strengthen nuclear command, control and communication systems.
- Improve cyber security of military and strategic infrastructure.
- Build crisis communication mechanisms with nuclear neighbours.
- Reduce arms import dependence through Atmanirbhar Bharat in defence.
- Continue support for universal, verifiable and non-discriminatory nuclear disarmament.
Conclusion:
India’s nuclear modernisation reflects the shift from traditional deterrence to a more complex strategic environment involving China, Pakistan, cyber warfare and global nuclear competition. India must maintain credible deterrence while avoiding unnecessary escalation. A balanced approach based on responsible nuclear policy, defence indigenisation, cyber preparedness and diplomatic engagement is essential for long-term national security.
