{"id":123908,"date":"2026-09-11T12:16:43","date_gmt":"2026-09-11T06:46:43","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=123908"},"modified":"2026-09-11T12:16:43","modified_gmt":"2026-09-11T06:46:43","slug":"fcnrb-deposits-rbi","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/fcnrb-deposits-rbi\/","title":{"rendered":"FCNR(B) Deposits &#8211; Who Finally Bears the Foreign Currency Exchange Risk"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><strong>FCNR(B) Deposits Latest News<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Indian banks mobilised over $127 billion through FCNR(B) deposits under a special RBI swap facility, but with the window now closed, attention has turned to who bears the foreign exchange risk on the principal and interest.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>About FCNR(B) Deposits<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Foreign Currency Non-Resident (Bank) deposits, or FCNR(B) deposits, are term deposits that non-resident Indians can maintain with Indian banks in foreign currency rather than in rupees.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The key feature is that both the principal and interest are denominated in foreign currency, typically US dollars.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This protects the depositor from rupee depreciation, a significant attraction for NRIs who would otherwise see the value of their savings erode if the rupee weakened.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These deposits are usually held for maturities of one to five years and are a long-standing instrument for attracting foreign currency into India&#8217;s banking system.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>The Special Swap Facility<\/strong><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">The <\/span><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/fcnrb-deposits\/\" target=\"_blank\"><span style=\"font-weight: 400;\">RBI introduced a special swap facility in June 2026<\/span><\/a><span style=\"font-weight: 400;\"> to encourage NRIs to place money in FCNR(B) deposits.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The context was pressure on the rupee from high oil prices and India&#8217;s need to strengthen its foreign exchange reserves amid the West Asia conflict.<\/span><\/li>\n<li><b>Response &#8211; <\/b><span style=\"font-weight: 400;\">the scheme attracted far more than anticipated:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Initial target: around $50 billion<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Actual mobilisation: more than $127 billion<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Given the scale of inflows, the RBI closed the window for fresh FCNR(B) deposits on August 31, 2026.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">For banks, the scheme provided a relatively cheap source of foreign currency funding. For the country, it added substantially to foreign exchange reserves at a time of external pressure.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>How the Risk Is Split<\/strong><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">Because these deposits typically carry three-to-five-year maturities, the question of who bears currency risk when principal and interest fall due becomes important.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The answer is that the risk has been divided between the central bank and commercial banks.<\/span><\/li>\n<li><b>The RBI Covers the Principal<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Under the swap arrangement, the RBI shields banks from foreign exchange risk on the principal amount. The central bank bears the cost of hedging this exposure.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Estimates place this hedging cost at up to 3% annually.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">In simple terms, the RBI is protecting the dollar value of the principal against movements in the rupee-dollar exchange rate, absorbing the cost of that protection itself.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Banks Handle the Interest<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">The swap facility does not cover the interest that banks must pay depositors in dollars.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This means banks have to arrange the dollars themselves for interest payments and manage that foreign exchange exposure independently.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>The RBI&#8217;s Cost-Benefit Position<\/strong><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">The RBI&#8217;s position is not purely a cost. The foreign currency received through these deposits adds to India&#8217;s reserves, which can then be invested.<\/span><\/li>\n<li><b>Recouping Reserves<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">By August 7, 2026, the RBI had recouped $31.2 billion of its foreign currency assets, equivalent to 55% of the amount mobilised at that point.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Part of this may be invested in US securities, which offer higher yields.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Potential Returns<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Estimates suggest the RBI could earn around 4.5% to 5% on the foreign exchange reserves generated through these deposits.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This could more than offset a hedging cost of up to 3%, assuming the foreign currency holdings are hedged for five years.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>The Scale of the Cost<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Research assuming FCNR(B) mobilisation of $65-70 billion and a 3% annual hedging cost calculated:<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Annual notional cost: about $2.1 billion<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Cumulative cost over five years: about $10.5 billion<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Against current reserves of around $700 billion, this works out to roughly 1.45% of the reserve stock over five years, a modest figure in relative terms.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Unhedged Exposure Among Banks<\/strong><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">Where the risk becomes more concerning is on the interest side.<\/span><\/li>\n<li><b>Who Is Hedging &#8211; <\/b><span style=\"font-weight: 400;\">pattern varies by type of bank:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Foreign banks are largely hedging this exposure.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Most state-run banks and several private-sector Indian lenders have left it unhedged.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Why Banks Are Not Hedging<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">The main reason cited is cost. Hedging the foreign exchange risk on interest payments for three-to-five-year deposits costs banks about 3% a year.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Since interest on these deposits is paid at maturity rather than periodically, some banks have chosen to avoid that cost upfront. Their plan is to buy dollars in the spot market when the payment actually falls due, rather than locking in protection in advance.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">One banker at a mid-sized state-run lender indicated the bank expected to handle payments through spot purchases when required.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>What Happens If the Rupee Weakens<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The consequences of leaving this exposure unhedged can be illustrated simply.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Consider a bank that must pay $1 million in interest:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">If the dollar costs Rs. 95, the payment requires Rs. 9.5 crore.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">If the rupee weakens and the dollar rises to Rs. 100 at maturity, the same payment requires Rs. 10 crore.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A bank that has hedged would be protected against this movement. A lender that has left the exposure unhedged absorbs the higher rupee cost directly.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>The Broader Assessment<\/strong><\/h2>\n<ul>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The FCNR(B) scheme achieved its immediate objective. It brought in substantially more foreign currency than targeted at a time when the rupee was under pressure and reserves needed strengthening.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI has taken on the exposure associated with the principal through its swap, and appears likely to cover that cost through returns on invested reserves.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks continue to face currency risk on the interest payments, and a substantial share of that exposure remains unhedged by choice.<\/span><\/li>\n<li style=\"font-weight: 400; text-align: justify;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This means a portion of the currency risk has been deferred rather than removed, surfacing only when the deposits mature.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/www.thehindu.com\/business\/Economy\/fcnrb-deposits-who-bears-the-currency-risk-explained\/article71446140.ece\" target=\"_blank\" rel=\"nofollow noopener\">TH<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>FCNR(B) deposits mobilised over $127 billion, but the RBI swap covers only the principal, leaving banks exposed to currency risk on dollar interest payments.<\/p>\n","protected":false},"author":21,"featured_media":115377,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[8048,60,22,59],"class_list":["post-123908","post","type-post","status-publish","format-standard","has-post-thumbnail","category-upsc-mains-current-affairs","tag-fcnrb-deposits","tag-mains-articles","tag-upsc-current-affairs","tag-upsc-mains-current-affairs","no-featured-image-padding"],"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/123908","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=123908"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/123908\/revisions"}],"predecessor-version":[{"id":123933,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/123908\/revisions\/123933"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/115377"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=123908"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=123908"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=123908"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}