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অর্থনীতিGS3
GS3

FCNR B Deposits Allocation and Currency Risk Mitigation Mechanics

Source:The Hindu ↗

কেন এটি গুরুত্বপূর্ণ

Understanding foreign currency deposit schemes like FCNR(B) and currency risk-sharing mechanisms is vital for aspirants studying India's external sector, capital inflows, foreign exchange reserves, and monetary policy management by the RBI.

সারসংক্ষেপ

The article explains the mechanics of Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits, highlighting who bears the currency risk when Non-Resident Indians deposit money in foreign currencies with Indian banks. Unlike accounts denominated in rupees where the depositor takes the exchange rate hit, FCNR(B) deposits insulate the depositor against currency depreciation because both principal and interest are repaid in the original foreign currency. Instead, the risk is absorbed by the authorized dealer banks and managed through forward cover mechanisms, impacting macro-financial stability and capital management in India.

মূল বিষয়

  • FCNR(B) deposits are foreign currency term deposits offered to Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in specified foreign currencies.
  • Because the principal and interest are denominated in foreign currencies (such as USD, GBP, EUR), the depositor bears no exchange rate risk.
  • The banking institution (and ultimately the domestic financial system or RBI through hedging/forward covers) handles or absorbs the currency fluctuation risk.
  • Such deposit schemes help India attract stable foreign currency inflows and manage forex reserves, especially during periods of external macroeconomic vulnerability.

গুরুত্বপূর্ণ শব্দ

Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits

Fixed deposits held by NRIs in foreign currencies with Indian banks where both principal and interest are repaid in foreign currency, completely insulating depositors from currency depreciation risks.

UPSC context

Important for GS Paper III (Indian Economy, External Sector, and Forex Reserves management).

Source
Reserve Bank of India (RBI)

India's central banking institution responsible for regulating monetary policy, issuing currency, managing foreign exchange reserves, and supervising the banking system.

UPSC context

Core topic under GS Paper III (Banking and Financial Sector Reforms, Monetary Policy).

Source

প্রিলিমস ফাঁদ

depositor bears exchange rate risk in FCNR(B) accounts

Aspirants often assume that since the deposit is held in an Indian bank, the NRI depositor bears the risk of rupee depreciation. In FCNR(B), the depositor is fully insulated as repayment is in foreign currency.

সংযুক্ত স্থির ধারণা

Banking and Financial Sector Reforms

What are the key types of NRI deposit accounts permitted in India and their repatriation status?

  • NRE Accounts: NRE accounts are rupee-denominated, fully repatriable, and interest earned is tax-free in India.
  • NRO Accounts: NRO accounts are rupee-denominated, held for local income management, and repatriation is subject to limits and taxes.
  • FCNR(B) Accounts: FCNR(B) accounts are foreign currency-denominated term deposits, fully repatriable, insulating depositors from rupee exchange risk.

আন্তঃবিষয় প্যাটার্ন

  • Forex Management + Domestic Liquidity (RBI)

    Fluctuations in foreign exchange reserves directly impact domestic liquidity management and open market operations conducted by RBI.

  • Capital Account Convertibility + BOP Crises

    NRI deposit mobilization serves as a primary non-debt financial capital account cushion during balance of payment crises.

FCNR(B) risk-sharing mechanics + forex reserves management is prime material for a tricky statement-based prelims question.

সংযুক্ত PYQ · 3

সংযুক্ত PYQ · 3

  • 2024PrelimsGS1

    Consider the following statements in respect of the digital rupee : 1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy. 2. It appears as a liability on the RBI's balance sheet. 3. It is insured against inflation by its very design. 4. It is freely convertible against commercial bank money and cash. Which of the statements given above are correct?

  • 2021PrelimsGS1

    Consider the following : 1. Foreign currency convertible bonds 2. Foreign institutional investment with certain conditions 3. Global depository receipts 4. Non-resident external deposits Which of the above can be included in Foreign Direct Investments?

  • 2018MainsGS3

    How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?