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Foreign Currency Non-Resident (Bank) Deposit Scheme: FCNR(B) Scheme Announced by Government to Counter falling Forex Reserves

  • The Foreign Currency Non-Resident (Bank)—or FCNR(B)—deposit scheme is a term-deposit instrument regulated by the Reserve Bank of India (RBI) under the provisions of the Foreign Exchange Management Act (FEMA), 1999 and Section 35A of the Banking Regulation Act, 1949.
  • The Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Persons of Indian Origin (PIOs) can open fixed term deposits in designated foreign currencies with authorized commercial banks in India.
  • In Indian macroeconomic policy, the FCNR(B) scheme acts as a critical Capital Account instrument used to bolster foreign exchange reserves, absorb external sector shocks, and stabilize the Balance of Payments (BoP).


Evolution and Historical Context

  • FCNR(B) Scheme was first Introduced on May 15, 1993, replacing the original FCNR(A) scheme (introduced in 1975).  In the FCNR(A) Scheme, the foreign exchange risk was borne by RBI and subsequently by the Govt. of India. 
  • The FCNR(A) scheme was withdrawn in August, 1994 in view of its implications for the central bank’s balance sheet and quasi-fiscal costs to the Government.
  • Under FCNR(B), commercial banks bear the exchange rate risk, removing the liability from the central bank’s balance sheet.

Salient Features of FCNR(B) Scheme

Account Currency: Held directly in foreign currency—primarily US Dollar (USD), British Pound Sterling (GBP), Euro (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), and Australian Dollar (AUD).
Tenure: Fixed deposits carry a minimum term of 1 year and a maximum term of 5 years.
Zero Exchange Rate Risk for Depositors: Because both the principal and interest are maintained, compounded, and repaid in the designated foreign currency, the depositor is completely protected against Rupee ($₹$) depreciation.
Repatriability: 100% fully and freely repatriable abroad without quantitative restrictions or conversion costs.
Taxation Status: Interest earned on FCNR(B) accounts is 100% exempt from Indian Income Tax under Section 10(15)(iv)(fa) of the Income-tax Act, 1961.
Returning Indians: NRIs returning to India permanently can convert FCNR(B) term deposits into Resident Foreign Currency (RFC) accounts without incurring premature withdrawal penalties.

FCNR(B) vs NRE vs NRO Accounts

FeatureFCNR(B) AccountNRE (Non-Resident External)NRO (Non-Resident Ordinary)
Currency MaintainedForeign CurrencyIndian Rupee (INR)Indian Rupee (INR)
Source of FundsOverseas IncomeOverseas IncomeIndian Income (Rent, Dividends)
Exchange Rate RiskNone (Borne by Bank)Borne by DepositorBorne by Depositor
RepatriabilityFully RepatriableFully RepatriableRestricted (USD 1 Million/FY)
Taxation in IndiaTax-FreeTax-FreeTaxable (Subject to TDS / DTAA)

How RBI Uses FCNR(B) as a Counter-Cyclical Tool

The Reserve Bank of India actively uses FCNR(B) regulatory mechanisms to manage capital flows during global macro shocks and domestic currency stress:

A. USD-INR Forex Swap Facility

When foreign exchange reserves experience volatility or the Rupee faces downward pressure, the RBI announces a Special Foreign Exchange Swap Facility for FCNR(B) deposits.

Par Swap Mechanism: Commercial banks mobilize 3-to-5-year FCNR(B) deposits and sell the foreign currency to the RBI via a spot swap, signing a forward buy-back contract at maturity.

Absorption of Hedging Cost: The RBI absorbs/subsidizes the hedging cost. This allows banks to offer higher returns on foreign currency deposits without taking on unhedged balance-sheet exposure, driving capital inflows directly into India’s Capital Account.

B. Reserve Requirements & Regulatory Exemptions

To encourage banks to aggressively mobilize global funds:

Exemptions from CRR and SLR: The RBI periodically exempts fresh FCNR(B) mobilizations from mandatory Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) maintenance, allowing 100% deployment for lending.

Interest Rate Ceiling Relaxations: The central bank selectively suspends or raises interest rate ceilings (traditionally capped over benchmark overnight rates like SOFR/LIBOR) to increase yield competitiveness against foreign financial assets.

Limitations & Concerns (Mains Analytical Framework)

Debt-Creating Capital Inflows: Unlike Foreign Direct Investment (FDI), FCNR(B) deposits constitute debt-creating capital liabilities with defined maturities, offering short-to-medium-term balance of payments support rather than permanent equity capital.

Maturity & Refinancing Risk: Concentrated maturity windows of FCNR(B) deposits require significant dollar liquidity for outflows if rollover rates decline.

Yield Arbitrage: Concessional swap windows provided by the central bank can distort domestic market forward-premia and create short-term rate arbitrage opportunities between domestic and overseas money markets.


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