Context: The Reserve Bank of India (RBI) introduced a special dispensation allowing commercial banks to mobilize fresh three- to five-year Foreign Currency Non-Resident (Bank), or FCNR(B).
About Foreign Currency Non-Resident (Bank):
What It Is?
- FCNR(B) deposits are specialized, fixed-term foreign currency bank accounts opened in India by Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Persons of Indian Origin (PIOs).
- Unlike standard NRI accounts that automatically convert foreign currency into Indian Rupees, FCNR(B) deposits allow overseas Indians to fully retain their savings in global currencies.
Aim:
- The aim of the FCNR(B) scheme is to provide Indian banks with a stable, large-scale source of low-cost overseas funding to shore up the country’s capital account.
- For depositors, it provides an investment route to earn tax-free returns in India without taking on the risk of local currency depreciation.
How It Works & New RBI Swap Mechanism?
- Deposit Inflow: An NRI places funds into an Indian bank in designated currencies like the US Dollar ($), Pound Sterling (£), Euro (€), Japanese Yen (¥), Australian Dollar (A), or Canadian Dollar (C).
- The First Leg (Spot Transaction): The commercial bank sells these foreign dollars to the RBI once a week in multiples of $1 million. This exchange takes place at the official daily FBIL Reference Rate published by Financial Benchmarks India Private Limited.
- The Second Leg (Forward Buyback): The bank simultaneously agrees to buy back the exact same amount of foreign currency from the RBI at the end of the three- to five-year maturity period.
- Concessional Par Pricing: Because the buyback occurs at par (the exact same exchange rate as the first leg), the RBI absorbs the entire forward premium, eliminating the bank’s operational hedging expenses.
Key Features of the FCNR(B) Framework:
- Complete Income Tax Exemption: All interest income earned on FCNR(B) deposits is entirely exempt from income tax in India, provided the account holder maintains their legal non-resident status under Indian tax laws.
- Exemption from CRR and SLR Sops: To maximize lending margins, fresh deposits accumulated under this window are completely exempted from the Cash Reserve Ratio (minimum liquid cash mandates) and the Statutory Liquidity Ratio.
- Internationally Linked Interest Caps: While interest rates are linked to international global benchmarks, they are traditionally 250–300 basis points lower than domestic Rupee fixed deposits. For example, current three-year FCNR(B) rates hover around 3% to 3.65%, whereas normal domestic Indian fixed deposits offer over 6%.
- Competitiveness vs. Overseas CDs: Because US banks offer Certificate of Deposit (CD) yields above 4%, Indian banks are expected to raise their FCNR(B) rates by at least 100 basis points to attract global capital.
- The Macro Deposit Basket: FCNR(B) constitutes a core part of the $165.65 billion total NRI deposit base, alongside Rupee-denominated NRE (Non-Resident External) accounts and NRO (Non-Resident Ordinary) accounts meant for managing local Indian earnings.
