Foreign Currency Non-Resident (Bank) or FCNR(B) route

Source: The Economic Times

Context

The Central Government will nudge commercial banks to step up deposit mobilisation through the Foreign Currency Non-Resident (Bank) or FCNR(B) route, after the Reserve Bank of India announced it would bear the full hedging cost on fresh 3- to 5-year FCNR(B) deposits till 30 September 2026. Industry estimates suggest banks could raise up to USD 40 billion through this route, while PNB’s Managing Director Ashok Chandra sees overall inflows of USD 50 to 60 billion along with the concessional FX swap facility for PSUs. Banks are expected to reach out to NRI/OCI customers through both local and overseas branches in mission mode.

The Plan

• Centre to nudge banks to aggressively mobilise FCNR(B) deposits.
• Outreach will happen through local and overseas branches of Indian banks.
• Industry estimate: Banks may raise up to USD 40 billion through the FCNR(B) route.

What is an FCNR(B) Account?

• Full form: Foreign Currency Non-Resident (Bank) account.
• It is a term deposit (fixed deposit) held in India.
• The deposit is maintained in foreign currency, not in Indian rupees.
• It can be opened only by Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) or Overseas Citizens of India (OCIs).
• It is a bank-level liability, not a sovereign borrowing.

Currencies Allowed

• USD (US Dollar), GBP (British Pound), EUR (Euro), JPY (Japanese Yen), AUD (Australian Dollar), CAD (Canadian Dollar), and a few others as permitted by the RBI.
• The depositor chooses one of the allowed currencies.

Maturity Range

• Minimum: 1 year.
• Maximum: 5 years.
• The RBI’s current swap window focuses on 3- to 5-year FCNR(B) deposits.

Tax Treatment

• Interest earned on an FCNR(B) account is tax-free in India for the NRI/OCI depositor.
• This is one of its biggest attractions for NRIs.

Why is the RBI Bearing the Hedging Cost?

• Banks raising dollar deposits in India have to hedge the currency risk because they will pay back in dollars in 3 to 5 years, but use the funds in rupees in the meantime.
• The hedging cost (about 3 per cent) usually eats into the bank’s spread.
• By absorbing this cost, the RBI effectively subsidises the bank, allowing it to offer attractive rates to NRIs while still being profitable.
• This is a rerun of the 2013 strategy, when about USD 30 billion was raised through a similar swap window during the taper tantrum.

Why Is This So Important Right Now?

• The rupee has been under pressure, with depreciation linked to FPI outflows, rising oil prices, and the West Asia conflict.
• India’s FCNR(B) mobilisation collapsed in FY26, with banks raising only about USD 946 million versus USD 7 billion in FY25.
• A fresh inflow surge can stabilise the rupee, shore up reserves, and ease pressure on the banking system.
• It is also a non-debt-creating capital flow that does not raise external sovereign debt.

How Does an FCNR(B) Inflow Help the Rupee?

• When NRIs deposit dollars in FCNR(B) accounts, dollars flow into India, boosting forex reserves.
• This increases dollar supply, which tends to strengthen the rupee against the dollar.
• It also gives the RBI more ammunition to intervene in the forex market if needed.

Key Terms

• FCNR(B) (Foreign Currency Non-Resident Bank) Account: A term deposit in India held by NRIs and OCIs in foreign currencies, with no rupee depreciation risk to the depositor.
• NRI (Non-Resident Indian): An Indian citizen residing abroad for tax or stay-related reasons.
• OCI (Overseas Citizen of India): A foreign citizen of Indian origin granted lifelong visa and certain rights in India (excluding voting).
• CRR (Cash Reserve Ratio): The share of deposits banks must keep with the RBI in cash, currently 3.0 per cent.
• SLR (Statutory Liquidity Ratio): The share of deposits banks must invest in government securities and approved instruments, currently 18.0 per cent.
• Hedging Cost: The cost of protecting against currency-rate movements, typically through swaps and forwards.
• Forex Swap: A contract to exchange currencies now and reverse the deal later at a pre-agreed rate, used by banks to manage currency risk.
• Net Interest Margin (NIM): The difference between a bank’s interest income and interest expense, as a percentage of interest-earning assets.
• Forex Reserves: A country’s stock of foreign currency, gold, IMF reserve position, and SDRs, held by the central bank, used to manage exchange rates and BoP needs.
• External Commercial Borrowings (ECBs): Foreign currency loans raised by Indian entities (including PSUs) from foreign lenders, subject to RBI rules.

Practice MCQs

Q1. With reference to the latest push for FCNR(B) deposit mobilisation, consider the following statements:

1. The Centre will nudge banks to step up FCNR(B) deposit mobilisation through local and overseas branches.
2. Industry estimates suggest banks could raise up to USD 40 billion through the FCNR(B) route.
3. The RBI will bear the full hedging cost for fresh 3- to 5-year FCNR(B) deposits till 30 September 2026.
4. The hedging cost typically borne by banks is around 3 per cent.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Q2. With reference to FCNR(B) accounts, consider the following statements:

1. FCNR(B) accounts can be opened only by NRIs and OCIs.
2. The deposits are held in foreign currencies like USD, GBP, EUR, JPY, AUD, and CAD.
3. The depositor does not bear rupee depreciation risk on FCNR(B) deposits.
4. Interest earned on FCNR(B) deposits is taxable in India for NRIs and OCIs.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; interest on FCNR(B) deposits is tax-free in India for NRIs and OCIs.)

Q3. With reference to the regulatory treatment of FCNR(B) deposits, consider the following statements:

1. FCNR(B) deposits are exempt from Cash Reserve Ratio (CRR) requirements.
2. FCNR(B) deposits are exempt from Statutory Liquidity Ratio (SLR) requirements.
3. The CRR is currently 3.0 per cent.
4. The SLR is currently 18.0 per cent.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

Q4. With reference to the macroeconomic impact of the FCNR(B) push, consider the following statements:

1. The new inflows are expected to bolster India’s forex reserves.
2. Bigger forex reserves can support the RBI’s ability to fight rupee depreciation pressures.
3. PNB MD Ashok Chandra estimated combined FCNR(B) and PSU forex inflows of USD 50 to 60 billion.
4. FCNR(B) inflows are classified as external sovereign debt and significantly raise India’s external debt burden.

Which of the above are correct?

(a) 1, 2 and 3 only (b) 1, 3 and 4 only (c) 2 and 4 only (d) 1 and 4 only (e) All four

(Statement 4 is wrong; FCNR(B) deposits are non-sovereign, bank-level liabilities and do not significantly raise India’s external sovereign debt burden in the way sovereign borrowings do.)

Answer Key

1. (d), All four statements are correct.
2. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because interest on FCNR(B) deposits is tax-free for NRIs and OCIs.
3. (d), All four statements are correct.
4. (a), Statements 1, 2, 3 are correct; Statement 4 is wrong because FCNR(B) deposits are not classified as external sovereign debt.