Patanjali Civil Services Academy

FCNR(B) Deposits and Balance of Payments [Prelims Bits]

Tags: Prelims Current events of national and international importance

Source: The Hindu

In July 2026, a surge in Foreign Currency Non-Resident (FCNR-B) deposits helped India record a $20.8 billion Balance of Payments (BoP) surplus despite a $7 billion current account deficit.
FCNR(B): Foreign-currency-denominated term deposits maintained in Indian banks by Non-Resident Indians (NRIs).
Currency: Deposits are maintained in permitted foreign currencies, insulating depositors from exchange-rate risk on the principal.
July 2026 inflow: $33.5 billion under the special FCNR(B) scheme.
Capital account surplus: $27.7 billion in July 2026, up from $3.5 billion in July 2025.
Overall BoP surplus: $20.8 billion in July 2026.
Without the special FCNR(B) inflow, the capital account could have recorded a $4.8 billion deficit, worsening the overall BoP position.
FCNR(B) deposits differ from NRE deposits: FCNR(B) accounts are foreign-currency denominated, while Non-Resident External (NRE) accounts are rupee denominated.
Balance of Payments (BoP) records a country's economic transactions with the rest of the world; broadly, it comprises the current account and capital/financial account.

Q1. With reference to Foreign Currency Non-Resident (FCNR-B) deposits and India's Balance of Payments (BoP), consider the following statements:

FCNR(B) deposits are denominated in foreign currencies, whereas Non-Resident External (NRE) deposits are denominated in Indian rupees.
An increase in FCNR(B) deposits can strengthen India's external balance by generating capital/financial inflows even when the current account is in deficit.
Since FCNR(B) deposits are liabilities of Indian banks to non-residents, their inflow necessarily represents an improvement in India's current account balance.
Holding an FCNR(B) deposit in a permitted foreign currency can protect the depositor's principal from fluctuations in the rupee's exchange rate.

Which of the statements given above are correct?

(a) 1 and 2 only
(b) 1, 2 and 4 only
(c) 2 and 3 only
(d) 1, 3 and 4 only

Answer: (b) 1, 2 and 4 only

Explanation:

Statement 1 is correct: FCNR(B) deposits are foreign-currency denominated, while NRE deposits are rupee-denominated.
Statement 2 is correct: Capital/financial inflows can offset a current account deficit and contribute to an overall BoP surplus.
Statement 3 is incorrect: Such inflows belong to the capital/financial side, not the current account. A capital/financial inflow does not directly improve the current account balance.
Statement 4 is correct: Since the deposit is maintained in a permitted foreign currency, the principal is insulated from rupee exchange-rate fluctuations from the depositor's perspective.