FCNR deposit: High interest and 19X leverage? Know the hidden risks NRIs must watch out for

FCNR (B) deposits have attracted significant foreign-currency investments after the government announced that it would bear hedging costs on 3–5-year deposits. Major banks have raised rates on these deposits, while some, including HSBC Bank, are offering leverage. RBI data showed FCNR (B) deposits at $36.73 billion as of July 31, 2026, up 111% from the previous update.

FCNR (B) deposits may suit NRIs who already hold savings in an eligible foreign currency and want to retain that currency exposure. However, investors should consider where they will eventually use the money. Converting funds solely to invest can involve conversion costs and exchange-rate movements. The right choice depends on the investor's currency needs, not just the deposit rate.

FCNR (B) deposits protect investors from rupee depreciation while the money remains in the foreign currency. But this protection may not eliminate currency risk. If you eventually convert the deposit into rupees for property, family expenses or other needs, an unfavourable exchange-rate movement at maturity could reduce the value of your returns when converted.

A 3- or 5-year FCNR (B) deposit may not be as liquid as it appears. Premature closure can involve penalties or other charges, while the interest rate may be recalculated at a lower applicable rate for the period the deposit was actually held. If circumstances change during the tenure, exiting early could significantly reduce your expected returns.

HSBC Bank is offering up to 19X leverage on FCNR (B) deposits. For example, a $10,000 deposit could support borrowing of up to $190,000. Leverage can magnify returns when the deposit earns more than the borrowing cost. But the spread can be narrow, so changes in loan rates, pricing or taxes can quickly reduce or eliminate the expected gain.

Suppose an FCNR (B) deposit earns 6%, while the borrowing cost is 5.5%. The 0.5 percentage-point spread can enhance the return on the investor's own capital when leverage is used. But if the borrowing rate rises, that spread can shrink or turn negative. Loan setup costs, compounding and differences between deposit and loan tenures can further reduce actual returns.

Interest on FCNR (B) deposits is tax-free in India for eligible NRIs, but the investor's country of residence may tax the interest. For example, the article notes that US- resident NRIs may face tax on FCNR (B) interest, while leveraged structures can create additional tax considerations. Therefore, investors should calculate returns after considering their overseas tax obligations.

The headline interest rate should not be the only factor when evaluating an FCNR (B) deposit. Investors should consider currency exposure, premature withdrawal rules, borrowing costs, leverage, setup charges and taxes in their country of residence. The key question is whether the investment still offers an attractive return after all these costs and risks are accounted for.