FCNR-What the fuss is all about?

What are FCNR Fixed Deposits?

FCNR stands for Foreign Currency Non-Residents account deposits. This is a Fixed Deposit Foreign Currency account and not a savings account. Deposits in this account can be made in any of the 6 major currencies

  1. US Dollar
  2. UK Pound
  3. Canadian Dollar
  4. Japanese Yen
  5. Australian Dollar
  6. Euro

Any NRI of Indian Nationality or Indian Origin can maintain this deposit account and earn regular interest on the same.

The Interest on FCNR Account should be calculated and paid in the manner indicated below:-

  • For deposits up to one year, at the applicable rate without any compounding effect.
  • In respect of deposits for more than 1 year, at intervals of 180 days each and thereafter for the remaining number of days. However, the depositor will have the option to receive the interest on maturity with the compounding effect.

Key Highlights of FCNR

  • Maturity of deposits: 1-5 years
  • Conversion to another designated currency is permitted at a cost to the account holder
  • The Interest on the FCNR Account is payable on the basis of 360 days to a year as per the guidelines laid out by RBI
  • Rate of Interest – Fixed or floating within the ceiling rate of LIBOR/SWAP rates for the respective currency/corresponding term minus 25 basis points
  • The deposits in this account are primarily governed under the Foreign Exchange Management Act, the Foreign Exchange Regulation Act and the rules & regulations made under it

Why choose FCNR Fixed Deposits?

With Interest rates on FD’s in India being significantly higher as compared to the interest rates in western countries, many NRI’s invest their surplus funds in fixed deposit in India through the 3 eligible forms of Bank Accounts allowed by RBI

  • NRO Account
  • NRE Account
  • FCNR Account

The risk involved with the first two types of investment is exposure to fluctuations in Foreign Exchange since it involves investment made only in Indian Rupees. To ensure that NRI’s and PIO’s are not exposed to such foreign exchange risk, the Indian Govt. has allowed NRI’s to invest in India in Foreign Currency itself in FCNR Account. Interest earned on these deposits is not taxable in India and nor is the principal deposited in these accounts taxable under the Wealth Tax.

Impact of FCNR on Indian Economy

Drop in Foreign exchange Reserve-

Maturity of FCNR-B deposits raised under a special scheme in 2013within next two months is expected to see a $26 billion outflow putting pressure on the local currency. To ease the pressure on rupee with dollars flowing out RBI has started digging into the foreign exchange reserve of the country (FX reserve stands at $367.647 billion as on 7th October 2016). Although the depreciation in the valuation of reserves held in euro and pound sterling has also contributed to the fall in FX reserves.

Implications for deposit costs and lending rates –

As these deposits mature, Banks have to substitute them with alternate deposits to avoid deterioration in the credit /deposit and LCR ratios. The FCNR deposits represent about 1.7% of aggregate deposits in the banking system. Banks will of course plan individually in their ALCOs and each of them may believe they are well covered for this outflow. However, when taken together at a systemic level, replacing such large amount of concentrated deposit outflow will not be easy, especially as credit growth picks up and with Banks’ LCR target for next year being 10% higher.

Limited impact of FCNR redemption-

At the time of the scheme, banks had entered into a swap agreement with the Reserve Bank of India (RBI). Banks that had lent cash for subscribing to the FCNR scheme would now pull back loans and RBI will pay the banks in rupees. Hence, liquidity won’t be an issue for the banking system. However, the nature of liquidity will be different as for the liquidity that the bank would receive; the lenders would have to account for Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which was not the case back in 2013 as the $26 billion worth FCNR deposits were exempt from CRR and SLR. Banks are now over invested in SLR securities and hence the SLR impact won’t be obvious, but impact due to CRR would be visible. Further, the RBI’s plan of injecting Rs 90,000 crore worth of liquidity through open market operations and a narrower rate corridor, would limit the contagion. However, impact could be seen in the foreign exchange hedging cost as RBI wouldn’t need to transact much in the foreign exchange forward markets after the FCNR deposits mature. Currently, RBI’s position in the forwards market is more than $20 billion to take care of the redemption. The fall in hedging costs will help the foreign investors to hedge cheap in the market and would push up demand for Indian bonds.

 

Written By- Navodit Mittal, NMIMS Mumbai

 

More Articles to read about FCNR:-

  1. http://blog.ipleaders.in/need-know-fcnr-accounts/
  2. http://economictimes.indiatimes.com/markets/stocks/news/learn-with-etmarkets-fcnrb-deposits-become-a-worry-now/articleshow/54304611.cms
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