Context: Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits have become a cheaper funding source for Indian banks because current FCNR(B) interest rates are lower than conventional rupee deposit rates, while foreign-exchange (FX) risk is borne by the Reserve Bank of India (RBI).
Key Prelims Points
- FCNR(B): Term deposits accepted by authorised Indian banks from Non-Resident Indians (NRIs) in permitted foreign currencies.
- Currency: Deposits are maintained in foreign currency, protecting the depositor from exchange-rate risk on the principal.
- Tenure:1–5 years.
- Repatriation: Both principal and interest are fully repatriable.
- Tax: Interest earned on FCNR(B) deposits is generally exempt from income tax in India for eligible NRIs.
- Current significance: Banks are offering roughly 5.25–6% on FCNR(B) deposits versus around 6.5–7.5% on conventional 3–5 year rupee deposits, making FCNR(B) relatively cheaper funding.
- CD:Certificate of Deposit (CD) is a negotiable money-market instrument issued by eligible banks/financial institutions for raising short-term funds.
Prelims Add-on — Key Distinction
- FCNR(B): Foreign-currency denominated → exchange-rate risk borne by depositor/bank arrangement.
- NRE Account: Rupee-denominated, fully repatriable; interest generally tax-exempt.
- NRO Account: Rupee-denominated; primarily used for income earned in India; repatriation is subject to prescribed limits/conditions.
