RBI move to end FCNR(B) scheme a 'prudent' step, say bankers, Pg6

Key Highlights:

• The Reserve Bank of India (RBI) prematurely closed the concessional swap facility for Foreign Currency Non-Resident (Banks) Deposit Scheme (FCNR(B)) deposits on August 31, a month ahead of its initial September 30 deadline.
• The decision was deemed "prudent" by bankers due to the "encouraging response" to the scheme.
• The swap facility successfully attracted a substantial $52.3 billion by August 13.
• Bankers anticipate an additional $20 billion in inflows before the final closure.

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Detailed Insights:

• The FCNR(B) scheme allows Non-Resident Indians (NRIs) to hold fixed deposits in designated foreign currencies with Indian banks, safeguarding them from rupee depreciation.
• The concessional swap facility was introduced by the RBI to encourage foreign currency inflows into India, aiming to stabilize the rupee and bolster foreign exchange reserves.
• Under this facility, the RBI offered banks incentives, including bearing the exchange rate risk and providing exemptions from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements on these deposits.
• Banks could sell the foreign currency mobilized through FCNR(B) deposits to the RBI and simultaneously agree to buy it back at maturity at the same exchange rate, effectively reducing their hedging costs.
• A similar swap window was previously implemented by the RBI in 2013 during a period of significant pressure on the Indian rupee, which also proved successful in attracting foreign funds.
• The early closure indicates that the RBI achieved its objectives for foreign currency mobilization sooner than expected, and bankers view it as a responsible move to manage liabilities.

Key Concepts Involved:

• Foreign Currency Non-Resident (Banks) Deposit Scheme (FCNR(B)): A fixed deposit account for Non-Resident Indians (NRIs) in foreign currencies, protecting against exchange rate fluctuations.
• Concessional Swap Facility: A mechanism where the RBI offers favorable terms to banks for swapping foreign currency deposits into rupees, reducing exchange rate risk for banks.
• Non-Resident Indians (NRIs): Indian citizens who reside outside India for an uncertain period, typically for employment, business, or vocational purposes.