Context
Indian banks mobilised over $127 billion through FCNR(B) deposits under the RBI’s special swap facility introduced in June 2026, far exceeding the $50 billion target. The facility closed on 31 August 2026, raising concerns over how foreign exchange risk will be shared between the RBI and banks.
About FCNR(B) Deposits
- FCNR(B) accounts are foreign-currency term deposits that NRIs can hold with authorised Indian banks in foreign currencies.
- Unlike NRE/NRO accounts, they are maintained in freely convertible foreign currencies, with both principal and interest payable in the deposit currency.
- As the deposit is not denominated in rupees, NRIs are protected from exchange-rate losses due to rupee depreciation.
- The permitted maturity is generally 1–5 years, making FCNR(B) deposits an important source of foreign-currency funds for Indian banks.
- The deposits are repatriable, allowing eligible NRIs to transfer the principal and interest abroad subject to applicable rules.
Special RBI Swap Facility
- Banks can swap the foreign currency mobilised through FCNR(B) deposits with the RBI for rupees, with an agreement to reverse the transaction at a pre-agreed exchange rate.
- The arrangement covers the principal-related exchange-rate risk, with the RBI bearing the hedging cost, estimated at up to 3% annually.
- Interest payments are not covered; banks must arrange the required foreign currency and bear the related exchange-rate risk.
- Thus, the facility shifts principal-related currency risk to the RBI, while banks retain the interest-related risk.
RBI’s Cost-Benefit Position
- The RBI can invest the foreign currency received through the facility as part of its foreign exchange reserves, including in US securities.
- By 7 August 2026, it had recouped $31.2 billion, or about 55% of the amount mobilised at that stage.
- Expected returns of 4.5%–5% on these assets could offset the hedging cost of up to 3% annually.
- For $65–70 billion of mobilisation, the estimated hedging cost was about $2.1 billion annually or $10.5 billion over five years.
Challenge: Unhedged Interest Exposure
- Risk Concentration: The interest component remains exposed to exchange-rate fluctuations because it is not covered by the RBI swap.
- Different Practices: Foreign banks largely hedge this exposure, while several public-sector and private Indian banks leave it unhedged.
- Hedging Cost: Protection for three-to-five-year exposure can cost around 3% annually, discouraging some banks from hedging.
- Rupee Depreciation: Banks may need to buy dollars at maturity; a weaker rupee would increase the cost of interest payments.
Significance
- External Stability: Mobilises foreign currency during periods of external-sector pressure.
- Forex Reserves: Strengthens India’s foreign exchange reserves and external liquidity.
- Bank Funding: Provides banks with an additional source of foreign-currency funds.
- Risk Sharing: Enables the RBI to absorb principal-related exchange risk, reducing the immediate currency exposure of banks.
Way Forward
- Risk Management: Banks should strengthen forex risk management and appropriately hedge long-term foreign-currency liabilities.
- RBI Oversight: The RBI should closely monitor maturity-wise currency exposures arising from FCNR(B) deposits.
- Transparency: Banks should disclose their hedged and unhedged forex positions to improve risk assessment.
- Financial Stability: Policy should balance foreign-currency mobilisation with exchange-rate risk control to strengthen India’s external and financial stability.
Additional Information: NRE vs NRO vs FCNR(B) Accounts
| Feature | NRE Account | NRO Account | FCNR(B) Account |
| Full form | Non-Resident External | Non-Resident Ordinary | Foreign Currency Non-Resident (Bank) |
| Currency | Indian Rupee (₹) | Indian Rupee (₹) | Foreign currency |
| Purpose | To keep foreign income in India | To manage income earned in India | To keep foreign earnings in foreign currency |
| Exchange-rate risk | Yes – value can change with rupee movements | Yes – value can change with rupee movements | No direct rupee exchange-rate risk |
| Interest taxation in India | Generally tax-free | Taxable | Generally tax-free |
| Repatriation |
Principal and interest can generally be freely transferred abroad |
Principal is subject to limits and RBI rules; interest can generally be repatriated |
Principal and interest can generally be freely transferred abroad |
| Can Indian income be deposited? | Generally, no | Yes | Generally, no |
| Main advantage | Tax-free interest and easy transfer of money abroad | Convenient for managing rent, pension, dividends and other Indian income | Protects savings from rupee exchange-rate fluctuations |
| Main disadvantage | Exposed to rupee exchange-rate changes | Interest is taxable and repatriation is restricted | Limited to permitted foreign currencies and returns depend on foreign-currency interest rates |
| Best suited for | NRIs keeping their foreign earnings in India | NRIs receiving income from India | NRIs wanting to retain savings in foreign currency |
Example
- NRE: An NRI earns dollars abroad but wants to keep the money in Indian rupees → NRE is suitable.
- NRO: An NRI earns rent from property in India → NRO is suitable.
- FCNR(B): An NRI earns dollars abroad and wants to keep the deposit in dollars without direct rupee exchange-rate risk → FCNR(B) is suitable.
FAQs
Q1. What are FCNR(B) deposits?
Ans. FCNR(B) deposits are foreign-currency term deposits maintained by NRIs with Indian banks. Both principal and interest are payable in foreign currency.
Q2. Why did the RBI introduce the special FCNR(B) swap facility?
Ans. It was introduced in June 2026 to attract foreign currency, strengthen forex reserves, and ease external pressure on the rupee.
Q3. Who bears the foreign exchange risk on the principal?
Ans. Under the swap arrangement, the RBI bears the currency risk on the principal and incurs the associated hedging cost.
Q4. Who bears the exchange-rate risk on interest payments?
Ans. Commercial banks remain responsible for the foreign currency required to pay interest.
