FCNR(B) deposits: Who bears the currency risk? | Explained
This article explains the mechanics and risks associated with FCNR(B) deposits, which were used by the RBI to bolster foreign exchange reserves. It clarifies that while the RBI hedges the currency risk for the principal amount, banks remain responsible for managing interest payment risks.
Why it matters
The management of foreign currency deposits is a key component of India's macroeconomic stability and its ability to withstand currency fluctuations.
The story so far: The Reserve Bank of India (RBI) introduced a special swap facility in June to encourage non-resident Indians to put money into FCNR(B) deposits, as the rupee faced pressure from high oil prices and India sought to strengthen its foreign-exchange reserves.
The response was much stronger than the RBI’s initial target, as Indian banks mobilised more than $127 billion through these deposits, against an initial target of about $50 billion. The RBI subsequently closed the window for fresh FCNR(B) deposits on August 31, 2026.
The scheme has given banks a relatively cheap source of foreign-currency funding and added substantially to India’s foreign-exchange reserves. The deposits typically have three-to-five-year maturities, raising the question of who bears the currency risk when the principal and interest have to be paid.
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