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What is the FCNR swap facility?

What is the FCNR swap facility?
In the scenario, when the domestic currency plummeted to the levels of nearly 68 against the dollar, government's as well as RBIs steps have considerably managed to stabilize the free-falling rupee. One such step taken by the RBI to restrict any further free-fall and at the same time attract more of dollars is the swap facility offered to banks in India for FCNR deposits.

As part of the FCNR swap deal, RBI in order to incentivise banks to attract foreign currency non-residential dollar deposits (FCNR) has kept open the window until 30th November'2013 wherein all of the fresh FCNR deposits raised for a term of minimum of 3 years can be swapped @ fixed rate of 3.5% on an annual basis for the entire term of the deposit. This way, banks are spared of the usual hedging cost that is as high as 7%. The incentive forms the basis to promote mobilization of foreign currency deposits into the country.

Simply put, on account of the foreign exchange rate fluctuations, foreign currency risks that banks are subjected to, is hedged by banks and the same entails a cost. The current forward rate or the rate at which banks agree to purchase the foreign currency in some pre-specified future term stands at a premium of nearly 7% p.a This rate or hedging cost will now be partially borne by the apex body to the extent of 3.5%.

It should be noted the facility has been extended only in case of FCNR deposits in dollar currency and until the 30th November'2013.

What FCNR swap facility has in for NRIs ?

With the facility, banks will increasingly lure NRIs to mobilize funds in FCNR deposits in dollar currency. That in the normal scenario is quiet lucrative as they earn significantly higher return of 3-4% on an annual basis. Also, with tax advantages and no currency risk, FCNR undoubtedly are good bets for NRIs. However, the swap facility does not results in any direct advantage or benefit for NRIs apart from the higher interest of over 5% on dollar deposits for tenure more than 3 years.

Story first published: Wednesday, October 16, 2013, 13:47 [IST]
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