FCNR(B) Deposits

An FCNR(B) deposit is a fixed deposit that a Non-Resident Indian (NRI) can open with a bank in India, but in a foreign currency like the US dollar. The money stays in that foreign currency, so the depositor does not lose if the rupee falls. It is a key channel through which Indians abroad send savings into Indian banks, and it helps India's foreign exchange reserves.

Why does it exist?

India often buys more from the world than it sells, so it needs a steady flow of foreign currency. NRIs are a large, loyal source of such money. But an NRI keeping money in rupees takes a risk: if the rupee weakens, the deposit is worth fewer dollars later. FCNR(B) removes this worry for the depositor because both the deposit and the interest stay in foreign currency.

Where did it come from?

• 1975: FCNR(A) scheme. India first launched a foreign currency deposit scheme for NRIs. The exchange rate risk was borne by the RBI (and later the government). When the rupee fell, the public sector bore large losses.
• May 15, 1993: FCNR(B) scheme. This replaced FCNR(A). The "B" stands for Bank. Now the banks bear the exchange risk, not the RBI. FCNR(A) was phased out over the next few years.

How does it work?

• Who can open it: Non-Resident Indians and Persons of Indian Origin (persons resident outside India under the Foreign Exchange Management Act (FEMA)).
• Account type: Term (fixed) deposits only, for 1 to 5 years. There are no savings or current FCNR(B) accounts.
• Currencies: Freely convertible currencies such as US dollar, British pound, euro, Canadian dollar, Australian dollar and Japanese yen.
• Repatriation: Both principal and interest can be freely sent back abroad.
• Tax: Interest is exempt from Indian income tax while the holder is a non-resident (or "resident but not ordinarily resident").
• Interest rate ceilings: The RBI caps the rates banks can offer. The rule links the cap to the overnight Alternative Reference Rate (ARR) of that currency (such as SOFR for the dollar): up to ARR + 2.5 percentage points for 1 to less than 3 years, and ARR + 3.5 percentage points for 3 to 5 years. The RBI relaxes these caps when it wants more inflows.

A simple example: an NRI in Dubai deposits USD 10,000 for three years. After three years, the bank pays back USD 10,000 plus interest in dollars. The rupee's movement does not matter to this person.

The bank's side and the role of swaps

A bank receives dollars but usually wants to lend in rupees in India. If it converts dollars to rupees and the rupee falls, it will need more rupees to repay the dollars later. So the bank must hedge, often through a forex swap. Hedging costs money, which can make FCNR(B) funds expensive.

This is where the RBI can step in with a swap window: the bank sells its dollars to the RBI today and agrees to buy them back at maturity at a pre-fixed rate. If the RBI offers this at a cheaper-than-market (concessional) cost, FCNR(B) deposits become attractive for banks, and inflows rise. The dollars go into India's reserves in the meantime.

• 2013: During the "taper tantrum" (a sharp fall of the rupee after the US signalled it would slow its money printing), the RBI opened a swap window in September 2013 for FCNR(B) deposits of 3 years or more at a fixed concessional rate of 3.5% a year. Together with a second window for bank foreign borrowings, it brought in about USD 34 billion, of which about USD 26 billion came through FCNR(B).
• 2026: Amid pressure from West Asia tensions and high energy prices, the RBI opened a concessional swap facility in June 2026 for fresh FCNR(B) deposits (mainly 3 to 5 years), along with foreign borrowings by banks and companies. It also temporarily removed the rate ceiling on 3 to 5 year FCNR(B) deposits from June 17 to September 30, 2026. The FCNR(B) part of the window was closed on August 31, 2026, a month earlier than the September 30 deadline, after very large inflows.

How it affects the rupee and liquidity

When the RBI buys the dollars from banks under the swap, it pays them in rupees. This adds rupees to the banking system, so system liquidity rises. At the same time, the RBI's foreign exchange reserves go up, which supports the rupee.

Commonly confused concepts

• FCNR(B) vs NRE account: An NRE (Non-Resident External) account holds money in rupees. It is fully repatriable and its interest is tax-free, but the depositor carries the rupee risk. FCNR(B) holds money in foreign currency, so the depositor carries no rupee risk.
• FCNR(B) vs NRO account: An NRO (Non-Resident Ordinary) account is in rupees and holds income earned in India (rent, pension, dividends). Its interest is taxable in India and repatriation is limited.
• FCNR(A) vs FCNR(B): In FCNR(A) (1975), the RBI and government bore the exchange risk. In FCNR(B) (1993 onwards), banks bear it.
• FCNR(B) vs RFC account: A Resident Foreign Currency (RFC) account is for Indians who have returned to India and want to keep their foreign savings in foreign currency.
• Forex swap vs outright purchase: In a swap, the RBI buys dollars now and sells them back later at a fixed rate, so it is temporary. In an outright purchase, the RBI keeps the dollars.

Issues, criticism and the way forward

• Cost to the RBI: A concessional swap means the RBI takes on part of the hedging cost that the market would otherwise charge. Analysts debate how much this costs over the life of the deposits.
• Hot money and redemption risk: These deposits come due together after three to five years. In 2016, the 2013 deposits matured and large outflows had to be managed. The RBI must plan reserves for such bunched repayments.
• Borrowed, not earned, reserves: Reserves built through such deposits are liabilities that must be repaid, unlike reserves built from export earnings or FDI.
• Liquidity side effects: A sudden surge in rupee liquidity can push short-term interest rates down and complicate monetary policy.
• Way forward: Experts suggest using such windows only in times of stress, spreading maturities, and strengthening long-term stable inflows like FDI and export growth.

Concepts to Know

• Non-Resident Indian (NRI): An Indian citizen who lives outside India, for example for work.
• Repatriation: Sending money out of India back to the depositor's country of residence.
• Hedging: Taking a step, such as a forex contract, to protect against losses from price or currency movements.
• Forex swap: An agreement to exchange one currency for another today and reverse it on a future date at a pre-agreed rate.
• Alternative Reference Rate (ARR): An overnight benchmark interest rate for a currency, such as SOFR (Secured Overnight Financing Rate) for the US dollar. It replaced LIBOR.
• System liquidity: The amount of spare money in the banking system that banks can lend or park with the RBI.