FCNR(B) deposits: Who bears the currency risk?

Foreign Currency Non-Resident (FCNR) deposits are a key funding source for Indian banks. Under the RBI swap mechanism, the central bank shields banks from currency risk on the principal amount. However, banks themselves must manage the dollar interest payments on these deposits, potentially exposing them to losses if the rupee weakens significantly.

This arrangement creates an asymmetry where banks benefit from RBI protection on the core amount but face exposure on the interest component. The structure reflects efforts to balance deposit mobilization with systemic stability considerations.