How does currency risk work on an FCNR deposit compared to a rupee NRE fixed deposit?

The trade-off is currency exposure versus interest rate. An NRE fixed deposit is denominated in rupees and typically pays a higher interest rate, but if the rupee weakens against the dollar, your returns shrink when you convert back to USD, and a sharp depreciation can wipe out the rate advantage. An FCNR deposit is held directly in dollars (or another chosen currency), so there's zero rupee conversion risk on the principal, but rates are lower because they track global dollar rates. If you're fairly sure you'll eventually spend the money in the US, FCNR removes exchange-rate uncertainty. If you'll spend it in India, NRE's higher rupee yield may win. Match the currency of the deposit to the currency of your future spending.