FCNR(B) Deposits Offer Indian Banks a Cheaper Alternative to Domestic Funding

Gist A recent research note by Bank of America BofA Securities indicates that Foreign Currency Non-Resident Bank deposits have currently become a much cheaper source of funding for Indian commercial banks than domestic rupee deposits. Because the Reserve Bank of India RBI is absorbing the foreign exchange FX risk under the scheme's current design, banks can offer lower interest rates to foreign depositors without bearing the cost of currency hedging. For a civil services aspirant, this highlights the practical mechanisms through which the central bank's external sector interventions directly improve the domestic banking sector's cost of capital. Background The Foreign Currency Non-Resident Bank or FCNR B scheme allows Non-Resident Indians NRIs to open term deposit accounts in freely convertible foreign currencies such as USD, GBP, or EUR rather than converting their money into Indian Rupees. Because the deposit is held and repaid in the foreign currency, the NRI depositor is completely shielded from exchange rate fluctuations. However, when domestic banks convert these foreign funds into rupees to lend domestically, they face Foreign Exchange FX risk —the danger that the rupee…