1. On September 4, RBI offered special swap rate against FCNR. It was the offer of cheaper forward rates for banks as part of the swap that brought in huge foreign exchange inflow and rescued rupee. 2. RBI Notification [(1](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=29480) and [2](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8388&Mode=0)\). 3. RBI needed capital flows to [[Measures to stabilise the exchange market#2013|stabilise]] the exchange rate. 4. Under the leadership of [[Raghuram G. Rajan|Raghuram Rajan]], it was [[The Independence of the Central Bank(Dr. Raghuram G. Rajan, Governor - September 3, 2016 - at St. Stephen's College, New Delhi)#^46cdb6 | suggested to RBI]] to raise foreign exchange (US$) from abroad with use of FCNR (B) deposits. ## FCNR (B) Scheme 1. FCNR (B) is a [[Deposits and Accounts#^1d69f3|deposit scheme]] for NRIs or a Person of India origin. 2. ==NRIs or a Person of India origin can deposit their foreign currency with an Indian Bank in form of FCNR(B) deposits.== 3. Deposits can be opened in USD/GBP/JPY/AUD/CAD. Maturity of 1-5 years 4. Depositors receive back principal and interest in original currency on maturity 5. Maximum interest rates between LIBOR/SWAP \+200 bps (1 to \<3 years) to LIBOR/SWAP \+400 bps (\>3 to 5 years). This ceiling rate is decided by RBI and rates are published are by FEDAI. 6. In October 2013, FCNR (B) deposit rates were between 4.78-5.53 % on (\>3 to 5 years) vs local borrowing rate/prime rate of 3.25% 7. The details are specified in the [Schedule 2](https://rbidocs.rbi.org.in/rdocs/content/pdfs/SCH040416_2.pdf) of [FEM (Deposit) Regulations, 2016](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10325&Mode=0) 8. In BoP flows, they form part of [[Half-Yearly Report of Forex Reserves#^99ad87|Capital Account/Banking Capital-NRI deposits]] 9. **Advantages of FCNR (B) Deposits** * Low rates on Certificate of Deposits (0.25-0.5%) compared to FCNR (B) deposits * NRIs could even borrow locally at interest rate 3.5-4% and offer it to Indian banks as FCNR (B) deposits for \>5% * Positive sentiment towards India * No exchange rate risk for the depositor. * NRIs can even avail of loans against FCNR(B) deposits * Both the principal and interest amounts are not taxed and are fully repatriable ## How did the Swap work? 1. ==[FAQs](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=1291) - Swap Window for attracting FCNR (B) Dollar funds==. 2. The swap was just like [[Forex Swaps#USD/INR Buy/Sell Swap Auction|BUY/SELL USD/INR swap auction]] undertaken by the RBI. 3. Let us consider the second leg (forward leg) of the swap of one year tenor 4. At the start of the swap: 1. On 23rd Sept. 2013, the USDINR spot rate was ₹62.63 2. First Leg \- Banks sold $1 to RBI at ₹62.63 5. At the end of one year: 1. Assuming, banks invested at rate of 10%, they had ₹68.89 at the end of one year 2. Second Leg \- Banks bought back $1 from RBI at rate of only 3.5% p.a., which was ₹64.84. This is the one year forward rate/swap rate by RBI 3. So, banks had $\dfrac{68.89}{64.84}$ $=$ $1.06246 in their hand 4. Thus, they made 6.25% returns on every dollar they raised 6. **How much banks had to return?** 1. FCNR(B) rates were 3-4% to NRIs vs assumed 6.25% returns made by banks due to cheaper forward rate/swap rate 2. The banks were able to hedge a risk of rise in USDINR using forward rate/Swap Rate offered by RBI. 3. Also, Indian banks got cheaper source of funds compared domestic deposit rates of around 9% | $=START | INR(B) | GROWTH RATE | 1-Yr-Forward Price \=$ | $=END | $ GROWTH RATE | | :------ | :-------- | :---------- | :--------------------- | :---------- | :------------ | | $1 | 62.63 | 10% | 7.4% \= Rs 67.35 | $1.022 | 2.2% | | **$1** | **62.63** | **10%** | **3.5% \= Rs 64.84** | **$1.0624** | **6.25%** | | $1 | 62.63 | 8% | 3.5% \= Rs 64.84 | \!1.0529 | 5.3% | **What if Banks did not hedge?** 1. FCNR(B) deposits are raised in foreign currency and returned to NRIs in the original foreign currency 2. So, no FX risk is borne by NRIs/depositors. 3. If banks do not lock their dollar buying rates, they would be exposed to exchange rate fluctuations, and could end up having even less than $1 for every $1 raised. | $=START | INR(B) | GROWTH RATE | PRICE OF $=END | $=END | $ GROWTH RATE | | ------- | ------ | ----------- | -------------- | -------- | ------------- | | $1 | 62.63 | 8% | INR 55 | 1.2298 | 23% | | $1 | 62.63 | 10% | INR 65 | 1.0598 | 6% | | $1 | 62.63 | 10% | **INR 70** | **0.98** | **\-2%** | ### Impact of Special Swap Window for FCNR(B) Deposits 1. The scheme was win-win situation for banks & NRIs. 2. Within few days, banks raised up to $30 bn due to promise by RBI of giving them back dollars at cheaper rate. 3. The [[Forex Swaps#USD/INR Buy/Sell Swap Auction|Buy/Sell USDINR swap]] helped Importers like OMCs as the US dollar fell against the Indian Rupee. Unhedged exporters lost value of receivables as the exchange rate of US$ fell. 4. All of the below factors helped in building up foreign exchange reserves: 1. The borrowings under the Swap Scheme which resulted in capital inflows in excess of US$ 34 billion 2. decline in CAD and 3. revival in equity flows 5. All of them, majorly the swap scheme, not only proved to be timely in strengthening external resilience but also helped in easing domestic liquidity significantly, which was reflected in under-utilisation of limits by the banks under overnight [[Liquidity Adjustment Facility (LAF)|LAF-repo]] and [[Exports & The RBI#^1d19fe|export credit refinance (ECR)]]. ## Regulations and Master Directions 1. [FEM (Deposit) Regulations, 2016](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10325&Mode=0) with effect from April 1, 2016 superseded and replaced the FEM (Deposit) Regulations, 2000 as amended from time to time. 2. [FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10444), with effect from [January 21, 2016](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10261&Mode=0), superseded and replaced the FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000. To operationalize the Regulations as may be necessary, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. 1. [Master Direction](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12825#20) - Reserve Bank of India (Interest Rate on Deposits) Directions, 2025 1. [FAQs](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=3737) on Master Direction - Reserve Bank of India (Interest Rate on Deposits) Directions, 2025 2. [Master Direction](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10198) - Deposits and Accounts 1. [Part I](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10198#P1:~:text=1-,Part%20I%20%2D%20Opening%2C%20holding%20and%20maintaining%20foreign%20currency%20accounts%20by%20a%20person%20resident%20in%20India,-2) - Opening, holding and maintaining foreign currency accounts in India by a person resident in India 2. [Part II](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10198#P1:~:text=2-,Part%20II%20%2D%20Opening%2C%20holding%20and%20maintaining%20accounts%20in%20India%20by%20a%20person%20resident%20outside%20India,-3) - Opening, holding and maintaining accounts (rupee and foreign currency accounts) in India by a person resident outside India 3. [FAQs](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=357) - Foreign Currency Accounts by Resident Individuals 4. RBI. *[FAQs](https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=3#FQ6) - Accounts in India by Non-residents.* ## Related Notes 1. [[Forex Swaps]] 2. [[Deposits and Accounts]] 3. [[Measures to stabilise the exchange market]] 4. [[Capital Account - Liberalisation]] 5. [[Bilateral, Multilateral Swaps, LoC, Liquidity Arrangements]] ## References 1. RBI. (2014). *Annual Report-2014, RBI.* 2. RBI. *[FAQs](https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=1291) - Swap Window for attracting FCNR (B) Dollar funds*