FCNR(B) deposit scheme: Significance, challenges and Way Forward

Source: The post “FCNR(B) deposit scheme: Significance, challenges and Way Forward” has been created based on “FCNR(B) deposit scheme: Significance, challenges and Way Forward” published in “Business Line” on 12th August 2026.

UPSC Syllabus: GS 3- Economy

Context: The Foreign Currency Non-Resident (Bank) [FCNR(B)] Deposit Scheme 2026 is an RBI initiative to attract foreign currency deposits from NRIs amid global uncertainty and pressure on capital flows and the rupee. By the end of July 2026, the scheme had mobilised around $36 billion.

Significance of the Scheme

1. Strengthens forex liquidity: The scheme brings foreign currency into the banking system and supports India’s external sector position.
2. Supports the rupee: Higher foreign currency inflows can improve market confidence and reduce pressure on the rupee.
3. Enhances reserves: It can contribute to strengthening India’s external buffers, although the impact on headline reserves may be limited.
4. Benefits banks: Banks receive stable foreign currency liabilities and enjoy CRR and SLR exemptions on eligible deposits.
5. Benefits NRIs: Depositors earn competitive foreign currency returns while remaining protected from rupee depreciation.
6. Supports financial stability: It provides an additional source of foreign currency funding during periods of global capital-flow volatility.

Comparison with 2013

1. In 2013, the scheme was introduced during the taper tantrum and generated substantial foreign currency inflows.
2. The rupee appreciated by nearly 10–12 per cent, reflecting improved market confidence.
3. In 2026, despite mobilisation of $36 billion, the rupee has remained broadly range-bound around ₹95–96 per US dollar.
4. Global geopolitical tensions, uncertainty over US trade policy, foreign investment flows and risk aversion have limited its impact.
5. The increase in forex reserves may also remain modest because the RBI has accumulated nearly $100 billion in forward forex sales, requiring part of incoming foreign currency to meet these obligations.

Key Concerns

1. Limited currency impact: Unlike 2013, the scheme has not produced significant rupee appreciation.
2. Limited reserve accumulation: Foreign currency inflows may not translate proportionately into higher headline reserves.
3. Cost to banks: Although attractive, FCNR(B) deposits may be more expensive than alternative sources of foreign currency.
4. Opportunity cost: A sovereign foreign-currency bond could potentially have been issued at around 100 basis points lower cost and could establish a sovereign dollar yield curve.
5. External liability concerns: Sovereign foreign-currency borrowing could expose the government balance sheet to exchange-rate and global financing risks.

Way Forward

1. India should continue using FCNR(B) deposits as a temporary and flexible external financing instrument during periods of global volatility.
2. The RBI should maintain adequate foreign exchange buffers and prudent forward-position management to absorb external shocks.
3. Banks should ensure that foreign currency liabilities mobilised through FCNR(B) deposits are deployed prudently and matched with suitable foreign currency assets.
4. India should deepen international debt markets and external commercial borrowing frameworks while maintaining safeguards against excessive foreign currency exposure.
5. Policymakers should continue prioritising macroeconomic stability, export competitiveness and diversified capital inflows rather than relying excessively on short-term foreign currency mobilisation.

Conclusion: The FCNR(B) scheme is a prudent middle path: it mobilises foreign currency without creating direct sovereign foreign-currency debt. Although its impact on the rupee and reserves may be weaker than in 2013, it remains valuable for strengthening external-sector resilience amid uncertain global capital flows.

Question: What is the significance of the FCNR(B) Deposit Scheme 2026 for India’s external sector? Discuss its effectiveness in comparison with the 2013 experience and suggest a way forward.

Source: Business Line