FCNR (B): A saviour for the Rupee; An opportunity for NRIs

It resembles a movie script, the Rupee has been destabilized by unidentified forces, it has started to roll down the slope, slowly, the speed of the fall is accelerating and it is rushing towards a chasm. People are horrified and desperately try to arrest the slide by throwing obstacles in its path, the ‘fall of the Rupee’ however shows no sign of abating; It is a tense situation.

Desperate times need desperate measures and times such as these needed some really sound measures, else the Rupee could disappear into the chasm. “When the going gets tough, the tough get going” and Dr. Raghuram Rajan, the new RBI governor, proved to be tough and equal to the task. He introduced a slew of measures to tackle the situation. The slide had to be stopped and then the Rupee needed to be pulled back to a respectable position.

FCNR (B) Deposits

The swap window introduced by the RBI for attracting FCNR (B) funds is one such step towards stabilization of the INR. A quick look into the concept of FCNR (B) (Foreign Exchange Non Resident (Banks)) funds tell us that this scheme is meant for Non Resident Indians (NRIs’) or Persons of Indian Origin (PIO’s) depending on their Residential Status.

Currency Risk

Interest earned by investing surplus funds in the respective (select) adopted country’s currency by NRIs’ usually yields a much lower return when compared to the returns earned if invested in India. However, investing in India can be risky if the fund is not protected against Foreign Exchange rate fluctuations.

FCNR (B) Deposits Eliminate Currency Risk

FCNR (B) fund is the ideal investment option for NRIs’ and PIOs’ as it eliminates the foreign exchange risk and allows them to hold Fixed Deposits in their respective currencies (US Dollar, British Pound, Euro, Japanese Yen, Australian Dollar, Canadian Dollar) and earn interest on them. The principal and interest on FCNR (B) deposits are fully repatritable and is not taxable in India. Loans upto Rs. 1 crore are allowed on FCNR (B) deposits with reference to their base rate and repayment can be made in either INR or foreign currency. Banks allow FCNR (B) deposits up to a maximum tenure of five years.

Here are a few salient points relating to the interest payment, interest rates and relevant rules and regulation which governs FCNR (B) deposits.

Features of FCNR (B) Deposits

Payment of Interest

• Paid on the basis of 360 days for deposits accepted under the scheme.
• Calculated and paid at intervals of 180 days and thereafter for the remaining actual number of days.
• Depositors’ have the option to receive the interest at maturity with compounding effect.

Interest Rates

• Interest ceiling for maturity period between 1 year and 3 years is LIBOR/Swap +200bps
• Interest ceiling for maturity period between 3 years and 5 years is LIBOR/Swap +400bps

FEDAI (Foreign Exchange Dealers Association of India) publishes the LIBOR/Swap rates on a monthly basis for FCNR (B) deposits on their website (fedai.org.in).

What is the mechanism of the RBI swap window and how will it help in mobilizing FCNR (B) deposits?

and leave them free to invest the fund in INR assets at a higher rate.

Let us take an example to illustrate the mechanism. A bank paying a return of 5.7% on a five year USD FCNR (B) deposit can approach the RBI and swap the USD to INR at a fixed rate of 3.5%. Thus the total cost to the bank is pegged at 9.27% (5.77%+3.5%). As per the current scenario, a five year AAA rated corporate bond is going to fetch a return of 10%. This will leave the bank with a margin of profit. The banks are also at liberty to lend the money to lower rated borrowers at a substantially higher level of yield.

USD interest rates are extremely low, at around 2%, and the FCNR (B) is an attractive option for the investor to park their funds without the risk of currency fluctuations. With the swap window in place, banks can go forward and aggressively market the USD FCNR (B) deposits to NRIs’. Banks can also earn an arbitrage between USD and INR interest rates.

What is in FCNR (B) Deposits for NRIs?

• 1) Higher interest rate.

• 2) No currency risk

3) Not taxable in India

These 3 factors make this FCNR (B) deposits more attractive for NRIs. The 3 year lock in period is something which they need to think through.

For what kind of NRIs FCNR (B) Deposits are Suitable

• 1) NRIs who need to meet their financial goals in USD or other major currencies i.e. who can’t take currency risk.

• 2) NRIs who would like to invest in risk free / safe investments.

3) NRIs who can lock their funds for 3 years or more.

FCNR (B) Deposits are really a win win situation for NRIs, Banks and RBI. NRIs get more returns without currency risk. Banks generate more deposits and income. RBI gets more Dollar inflow.

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