FCNR(B) Deposits: RBI’s Swap Window for NRI Capital
Why in the news
To draw NRI money, support the rupee and lift forex reserves, the RBI let commercial banks collect fresh 3-5 year FCNR(B) deposits while the central bank itself bears the hedging cost through a dedicated swap facility.
Key facts
- FCNR(B): fixed-term foreign currency deposit opened in India by NRIs, OCIs and PIOs.
- Currencies: USD, GBP, EUR, JPY, AUD, CAD and a few more.
- Maturity: 1 to 5 years; the swap scheme targets 3 to 5 years.
- Tax: interest fully exempt in India.
- CRR and SLR: exempt, so banks can deploy all the funds.
- Currency risk: sits with the bank, not the depositor.
Objectives
- Banks: stable, large, low-cost overseas funding to strengthen the capital account.
- NRIs: tax-free returns in India without rupee depreciation risk.
Four-step swap mechanism
- Deposit: NRI places foreign currency with an Indian bank as FCNR(B).
- Spot leg: weekly, the bank sells dollars to RBI (USD 1 million multiples) at the day’s FBIL Reference Rate.
- Forward leg: bank agrees to buy the same dollars back from RBI when the 3-5 year term ends.
- Par pricing: buyback rate equals the first-leg rate, so RBI absorbs the whole forward premium and the bank’s hedging cost (about 3.5%) disappears.
FBIL
- Financial Benchmarks India Private Limited acts as the country’s benchmark administrator and dates from 2014.
- Jointly owned by FIMMDA, FEDAI and IBA; regulated by the RBI.
- Publishes daily reference rates for USD-INR, EUR-INR, GBP-INR, JPY-INR and others; the default benchmark for regulatory FX deals.
Why it is strategic
- India has the largest diaspora, about 35 million NRIs and PIOs/OCIs.
- Remittances were about USD 138 billion in 2024, the biggest in the world.
- Expected benefits: USD 40-55 billion inflows, a steadier rupee in times of FPI outflows or oil shocks, bigger reserves and more varied bank funding.
FCNR(B) vs NRE vs NRO
| Feature | FCNR(B) | NRE | NRO |
|---|---|---|---|
| Currency | Foreign | Rupee | Rupee |
| Repatriation | Full | Full | Limited, up to USD 1 million a year |
| Interest tax | Tax-free | Tax-free | Taxable |
| Currency risk | Bank | Depositor | Depositor |
| CRR/SLR | Exempt | Applies | Applies |
| Account forms | Fixed deposit alone | Savings or FD | Savings, FD or current |
Key terms
- OCI: foreign citizen of Indian origin with lifelong visa and certain rights, excluding voting.
- PIO: a category largely merged with OCI in 2015.
- Forward premium: gap between forward and spot exchange rates.
- CRR: cash kept with RBI, currently 3%; SLR: investment in approved securities, currently 18%.
Exam angle
- Account type, eligible depositors and tax status of FCNR(B).
- Reference rate: FBIL; par pricing removes hedging cost.
- FCNR(B) carries bank-borne currency risk; NRE and NRO depositors bear it.