RBI’s steps on FCNR get FSDC nod

The Financial Stability and Development Council (FSDC) recently said that the Reserve Bank of India has taken the right steps to address the issue of concessional swaps against Foreign Currency Non-Resident (FCNR) deposits.

Background:

Banks had raised about $34 billion through FCNR (B) deposits in 2013, most of which are due this year. In 2013 the rupee was at an all-time low of 68.85 against the dollar and the central bank had asked commercial banks to raise the foreign currency deposits to shore up reserves. Banks, then, had swapped those dollars with the RBI. The central bank thereafter readied itself by buying forwards dollar. Now, the RBI estimates that the immediate effect of the maturity of these deposits would be an outflow of about $20 billion.

Details:

• FCNR (B) deposits mature mostly in three years. RBI had said that the swaps and the forwards will take care of the dollar requirement and should be neutral for the reserves. However, banks should witness deposit base depletion and some rupee liquidity will be strained.
• RBI had also said that it would take “all necessary measures to even out the resultant rupee liquidity gaps through use of appropriate instruments”.
• Assuring the market that the swaps are adequately covered by RBI’s forward purchases, the central bank, however, had also cautioned that the foreign exchange reserve could see some dip in the interim as the swaps and forwards are not timed perfectly.

FCNR:

An FCNR account is a term deposit account that can be maintained by NRIs and PIOs in foreign currency. Thus, FCNRs are not savings accounts but fixed deposit accounts. The account can be opened in the name of NRI individuals (single/ joint) or with resident Indians on ‘former or survivor’ basis.

What foreign currencies can one maintain in FCNR accounts?

Prior to 2011, FCNR deposits were allowed to be maintained in six currencies: US dollar, Pound Sterling (GBP), Euro, Japanese Yen, Australian dollar and Canadian dollar. However, in October 2011, the RBI decided that authorised dealer banks in India may be permitted to accept FCNR deposits in any permitted currency. ‘Permitted currency’ for this purpose would mean a foreign currency which is freely convertible and popularly include Danish Krone, Swiss Frank and Swedish Krona among others.

Exemption from IT:

It should also be noted here that interest income from FCNR (B) accounts is exempt from Income Tax. And deposit held under FCNR (B) a/cs is not taxable under Wealth Tax.