While the financial market is known for its volatile trends and conditions, one of the upcoming trends that have captivated investors is the FCNR (B) schemes. The FCNR (B) was a three-year foreign currency deposit scheme, which was held by Indian banks, sourced from NRIs in 2013. It was set to mature between back then and December 2016. While the RBI has taken the necessary precautions and steps to prevent a volatile outcome, there is a concern that the outflow could lead to an increase in demand for dollars. This, in turn, may lead to rupee unpredictability.
What is the FCNR (B) scheme?
During the financial year of 2013, the value of INR had dropped down to an all – time low of 68.85 Rs. against the USD. To bring about stability in the shaky, exchange rate, the RBI initiated a ‘swap programme’, which encouraged banks to attract sizeable dollar inflows in the form of the Foreign Currency Non-Resident (Bank) deposits.As a part of this programme, banks were encouraged to convince their NRI clients to deposit surplus USD at a fixed interest. At the same time, the RBI promised to shield banks from the exchange rate risk. On receiving the USD deposit in 2013, banks were allowed to switch these funds with RBI for a period of three years. At the same time, they would be required to pay a fixed cost of 3.5 % per annum. An amount of $26 billion was raised from the FCNR deposits to the RBI, in order to receive the rupee equivalent under this scheme.
What happened in the process?
Assuming that Rs. 60 per dollar was the exchange rate that was fixed for the swap agreement, an amount of Rs. 1, 56,000 crore would be given to the banks by the RBI. However, this would only happen after receiving the $26 billion from them under the swap agreement. After the three year period was fulfilled, banks have an obligation to swap back the sum that has to be raised with the RBI. In turn, the central bank will provide the dollars needed for banks to repay their NRI depositors.
Why is it important for you as an investor?
In reality, the redemption amount of $26 billion, would be an enormous outflow of foreign currency. At the same time, the RBI has a build an immense reserve of approximately $367 billion, while bringing forward contracts on the USD to repay the banks. However, if the parties who have already sold these forward dollars to the RBI are unable to afford the payments, they will be required to step into the open market to purchase dollars. This in turn may spark an unpredictable volatility in the currency markets sooner or later. At the same time, the sudden outflow of capital from India could also restrict the domestic market liquidity during a short period.
Conclusion: If you were an NRI lucky enough to invest in the FCNR (B) deposits, you would have earned a comfortable ROI, especially with the strengthening of the dollar against the rupee. However, if you have had any foreign obligations, in the later part of the year, you might face a slightly weaker rupee value.