FCNR(B) deposits: Who bears the currency risk? | Explained

Published 2026-09-10 · Updated 2026-09-10 · 3 min · 486 words

UPSC CSE Context

Why in News

RBI's special swap facility for FCNR(B) deposits raised $127 billion, but banks remain exposed to currency risk on interest payments.

Syllabus Connection

Indian Economy: banking, external sector, currency risk management.

Exam Relevance

Useful for questions on RBI policy tools, exchange rate management, and banking sector risk.

Core Issue

RBI swap covers principal, not interest, leaving banks exposed.

Key Development

Banks mobilised $127 billion via FCNR(B) deposits, but many left interest payments unhedged.

Stakeholders

• Indian banks
• NRIs
• Government of India

Static Knowledge

High-Value Background

• FCNR(B) deposits are foreign currency non-resident bank deposits, exempt from CRR/SLR.
• RBI swap facilities are used to manage liquidity and external sector stability.

Exam Linkage

• Links to external commercial borrowing, capital account convertibility, and exchange rate policy.

Concepts in Context

• Currency risk arises from mismatch between assets and liabilities in foreign currency.
• Hedging cost is the premium paid to protect against adverse exchange rate movements.

Institutions and Mechanisms

• RBI manages forex reserves and offers swap windows to banks.
• Banks manage asset-liability mismatches under RBI prudential norms.

Dynamic Analysis

Economy

• Unhedged interest exposure could amplify dollar demand if rupee weakens, pressuring reserves.
• RBI's hedging cost may be offset by returns on forex reserves, but timing mismatch exists.
• Large FCNR(B) inflows increase external debt, though concessional swap reduces immediate cost.
• Banks' reluctance to hedge reflects cost-benefit trade-off, potentially creating systemic risk.

Governance

• RBI's swap design transfers principal risk to central bank, but leaves interest risk with banks.
• Regulatory oversight may need to address unhedged exposures in state-run banks.
• Transparency in RBI's cost calculations is essential for public accountability.

International Relations

• FCNR(B) scheme taps NRI savings, strengthening India's external position.
• High mobilisation reflects confidence in Indian banking system among diaspora.
• Potential rupee depreciation could affect NRI returns, influencing future inflows.

Prelims Takeaways

• FCNR(B) deposits are exempt from CRR and SLR requirements.
• RBI's swap facility for FCNR(B) was introduced in June 2026.

Mains Value Addition

Arguments

• Unhedged forex exposure in banks can transmit currency shocks to the financial system.
• RBI's swap is a targeted intervention to bolster reserves without direct market operations.
• Cost of hedging influences bank behaviour, leading to risk concentration in public sector banks.

Examples

• State-run banks largely left interest exposure unhedged, while foreign banks hedged.

Data Points

• Banks mobilised $127 billion against initial target of $50 billion.
• RBI recouped $31.2 billion of foreign-currency assets by August 7, 2026.

Counterpoints

• RBI's hedging cost could exceed returns if global interest rates fall.
• Unhedged banks may face severe losses if rupee depreciates sharply.
• Large inflows may create asset-liability mismatches for banks.

Way Forward

• RBI should mandate minimum hedging requirements for FCNR(B) interest liabilities.
• Banks should adopt dynamic hedging strategies to manage currency risk.
• Strengthen supervisory review of unhedged foreign currency exposures.
• Develop deeper forex derivative markets to reduce hedging costs.
• Enhance coordination between RBI and banks on external sector risk management.

Primary/reference source: Economy