Commercial Banks Shoulder the Exchange Risk on FCNR(B) Deposit Interest

Gist The Reserve Bank of India RBI introduced a special swap facility to incentivize Non-Resident Indians to invest in FCNR B deposits , aiming to bolster India's forex reserves amid high oil prices. While this provided banks with cheap foreign-currency funding and massively boosted national reserves, the RBI only absorbed the foreign exchange risk on the principal amount. Commercial banks are left to manage the currency risk on the dollar-denominated interest payments, creating systemic vulnerabilities if the rupee weakens significantly before the deposits mature. Background FCNR B Foreign Currency Non-Resident - Bank accounts allow non-residents to park funds in India in freely convertible foreign currencies for fixed tenures, typically three to five years. Normally, Indian banks holding these deposits bear the exchange rate risk. If the rupee depreciates against the dollar, the bank has to spend more rupees to return the original dollar amount to the depositor. Under a Currency Swap Facility , the RBI takes the foreign currency mobilized by banks and provides them with rupees at the current spot rate, promising to buy back the rupees and return…