What is FCNR(B)?
Foreign Currency Non-Resident (Bank) deposits are fixed deposits held by Non-Resident Indians (NRIs) in foreign currency — typically USD, GBP, or EUR. The NRI earns interest in foreign currency and repatriates both principal and interest in foreign currency upon maturity. Critically, the NRI bears no currency risk. The bank does.
The Core Problem Banks Face
When a bank accepts a $1 deposit at, say, 5%, it must:
- Deploy those dollars into rupee assets (loans, SLR bonds, etc.)
- Hedge the currency risk — buy dollars forward so it can repay the NRI in USD when the deposit matures
That hedging costs money. Specifically, the forward premium — the cost of locking in a future USD/INR rate — is currently ~3.5% per annum. The bank's true cost of an FCNR(B) deposit without RBI support is therefore:
Interest paid to NRI + Hedging cost + SLR/CRR drag = Effective cost
The Numbers: Why Banks Have No Incentive
| Component | Rate |
| Current FCNR(B) card rate (3-year) | ~3.35% |
| Forward premium (hedging cost) | ~3.5% |
| Effective cost to bank | ~6.85%+ |
| Domestic 3-year deposit card rate | ~6.5% |
At ~6.85%+, FCNR(B) is more expensive than domestic deposits for the bank — with added operational complexity. There is no incentive to aggressively mobilise FCNR(B) deposits under this structure.
What RBI's Intervention Changes
RBI has offered two concessions running until 30 September:
- Bear the full hedging cost (the ~3.5% forward premium on behalf of banks)
- Exempt FCNR(B) deposits from SLR and CRR requirements
SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) are mandatory reserves banks must park with RBI, earning little to nothing. They represent a significant hidden cost drag on every deposit mobilised. With both costs removed, the bank's effective cost equation resets entirely:
| With RBI Support | Rate |
| Rate offered to NRI | 5.5%+ |
| Hedging cost borne by | RBI (0% to bank) |
| SLR/CRR drag | Waived |
| Net cost to bank | ~5.5% — competitive with domestic deposits |
Why 5.5%+ is Attractive to NRIs
The NRI's natural alternative is a US Treasury deposit of equivalent duration, currently yielding ~4%. An FCNR(B) deposit at 5.5% offers:
- A 150bps pickup over risk-free US rates
- Full denomination and repayment in USD — no currency risk to the NRI
- Completely repatriable principal and interest
This is a structurally compelling offer — not marginal outperformance but a decisive yield advantage in the same currency.
The 5-Year Cost to RBI
The fiscal cost of the scheme, quantified per billion raised:
| Cost Item | Quantum |
| Annual hedging cost absorbed by RBI | ~2.5% p.a. |
| Over 5-year tenor | ~12.5% total |
| Cost per $1 billion raised | $125 million |
This $125 million per billion is RBI's deliberate expenditure — a calculated subsidy to attract dollar inflows, shore up forex reserves, and defend the rupee. The cost is meaningful but manageable against the stability benefit of a large-scale inflow.
The $34 Billion Benchmark
In 2013, during the taper tantrum — when the rupee depreciated sharply to ~68/$ — RBI ran a structurally similar FCNR(B) scheme. It mobilised $34 billion in hard currency, which single-handedly stabilised the exchange rate and rebuilt India's external reserves.
Current conditions are at least as compelling: global uncertainty is elevated, NRI risk appetite toward India remains strong, and the yield pickup over US Treasuries is attractive. The $34 billion mobilised in 2013 should be treated as a floor, not a ceiling.
The One-Line Logic
RBI is subsidising the currency hedge so banks can offer NRIs dollar deposits at 5.5%+ — well above US Treasury rates — without banks taking unhedged currency risk. The cost to RBI is ~$125M per billion raised. The payoff: a potential $34B+ in hard currency inflows that directly strengthen India's external balance sheet.
Source: SBI Research Paper
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