Whenever there is turmoil in the global economy or the Indian Rupee starts falling against the US Dollar, then ‘FCNR Deposits’ start being mentioned increasingly in the corridors of banking and economy. Recently, a huge inflow of billions of dollars has been seen through FCNR deposits in Indian banks under the special ‘Swap Window’ of the Reserve Bank. According to the report, more than $21 billion has been transferred through FCNRB in just 42 days. Experts estimate that this figure may cross the $50 billion mark. But it is natural for the common man and investors to have a question that what is FCNR account and how does this money of Non-Resident Indians (NRIs) support the Indian currency? Let us understand in simple language.
What is FCNR deposit?
The full name of FCNR is Foreign Currency Non-Resident (Bank) Deposit. This is a special fixed deposit (Term Deposit) account opened in banks in India for NRIs (Non-Resident Indians) and PIOs (Persons of Indian Origin). The most important thing is that the money sent by NRIs in normal NRE or NRO accounts is converted into Indian rupees as soon as it reaches the bank. But in FCNR account, money is deposited in foreign currency only (like US Dollar, British Pound, Euro, Japanese Yen etc.) and interest is also available in the same currency.
What are the main features of FCNR accounts?
Complete freedom from currency risk
The biggest advantage of FCNR deposits is that the depositor has no risk of exchange rate fluctuations. If an NRI has deposited $10,000, on maturity he will get the entire money back along with interest in dollars—no matter how much the rupee strengthens or weakens during that period.
Completely tax-free in India
There is no income tax or other tax to be paid in India on the principal deposited in FCNR account and the interest received on it.
fully transferable
On completion of maturity, the depositor can take his entire money and interest back abroad without any paper complications or government permission.
How much money has arrived so far?
The Reserve Bank of India (RBI) has taken special measures to promote deposits in foreign currency from non-resident Indians (NRIs). These measures have led to $17.4 billion in foreign currency non-resident (FCNR(B)) deposits till last Friday, which shows the keen interest of investors in this scheme. RBI said in a statement that companies raised $ 1.34 billion through External Commercial Borrowing (ECB), while another $ 1.97 billion came from Overseas Foreign Currency Borrowing (OFCB).
The measures, including the special FCNR(B) deposit window, are part of the central bank’s larger efforts to attract foreign capital and support the rupee, which remains near record lows amid pressure from rising crude oil prices. RBI released the latest foreign exchange inflow data based on submissions received from authorized dealer banks.
The special facility for fresh FCNR(B) deposits will remain open till September 30, while the window for ECBs and OFCBs will continue till December 31. RBI’s swap window allows eligible banks and borrowers to exchange eligible foreign currency inflows with the central bank at a concessional rate. This reduces hedging costs and makes raising funds from abroad more attractive.
How does this NRI money strengthen the rupee?
Whenever the demand for dollars increases in foreign markets or foreign institutional investors (FIIs) withdraw money from the Indian stock market, there is a shortage of dollars in India and the rupee starts weakening. In such times, FCNR deposits act as a ‘protective shield’ for the Indian economy…
1. Increasing liquidity (supply) of dollars in the country: When NRIs deposit large amounts of money in FCNR accounts, foreign currency directly enters the Indian banking system. Increasing availability of dollars in the market creates a balance between demand and supply of rupees.
2. Boost to Forex Reserves: Banks can deposit the dollars in FCNR accounts in the Reserve Bank or use them for international trade finance. This strengthens India’s forex reserve, which is very important for the country’s rating and economic credibility.
3. The magic of RBI’s ‘Swap Window’: When the Reserve Bank feels that there is a shortage of dollars in the market, it opens a foreign currency swap window for banks. Banks hand over the FCNR dollars raised from NRIs to RBI for a fixed period. In return, RBI gives money to the banks so that they can give loans in the domestic market. On completion of the period, RBI returns the dollars to the banks. Due to which RBI gets billions of dollars in forex reserves immediately without purchasing expensive dollars from the market.
4. Control on the fall of rupee: When the rupee is under pressure in foreign markets, the inflow of dollars through FCNR deposits acts as a buffer in the market, preventing the rupee from falling suddenly. FCNR deposits are an effective economic weapon with the Government of India and the Reserve Bank, which on one hand provides safe and tax-free returns to NRIs on their foreign funds, and on the other hand maintains the credibility of the rupee by providing dollar backup to the Indian economy in times of crisis.
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