RBI’s steps on FCNR gets FSDC node

The Financial Stability and Development Council (FSDC) recently said that the Reserve Bank of India has taken the right steps to address the issue of concessional swaps against  deposits.

Foreign Currency Non-Resident (FCNR)

An FCNR account is a term deposit account that can be maintained by NRIs and PIOs in foreign currency. FCNRs are not savings accounts but fixed deposit accounts. The account can be opened in the name of NRI individuals (single/ joint) or with resident Indians on ‘former or survivor’ basis.

Details 

• FCNR (B) deposits mature mostly in three years. 
• RBI had said that the swaps and the forwards will take care of the dollar requirement and should be neutral for the reserves. 
• However, banks should witness deposit base depletion and some rupee liquidity will be strained. 
• RBI had also said that it would take “all necessary measures to even out the resultant rupee liquidity gaps through use of appropriate instruments”. 
• Assuring the market that the swaps are adequately covered by RBI’s forward purchases, the central bank, however, had also cautioned that the foreign exchange reserve could see some dip in the interim as the swaps and forwards are not timed perfectly.

Banks had raised about $34 billion through FCNR (B) deposits in 2013, most of which are due this year. In 2013 the rupee was at an all-time low of 68.85 against the dollar and the central bank had asked commercial banks to raise the foreign currency deposits to shore up reserves. Banks, then, had swapped those dollars with the RBI. The central bank thereafter readied itself by buying forwards dollar. Now, the RBI estimates that the immediate effect of the maturity of these deposits would be an outflow of about $20 billion.

Financial Stability and Development Council (FSDC)

Financial Stability and Development Council is an apex-level body constituted by the government of India. 

Composition of the council

Chairperson: 

• The Union Finance Minister of India

Members:

• Governor Reserve Bank of India (RBl),
• Finance Secretary and/ or Secretary, Department of Economic Affairs (DEA),
• Secretary, Department of Financial Services (DFS),
• Chief Economic Advisor, Ministry of Finance,
• Chairman, Securities and Exchange Board of India (SEBI),
• Chairman, Insurance Regulatory and Development Authority (IRDA),
• Chairman, Pension Fund Regulatory and Development Authority (PFRDA),
• Chairman, Forward Markets Commission (FMC).

Responsibilities

•  Financial Stability
•  Financial Sector Development
•  Inter-Regulatory Coordination
•  Financial Literacy
•  Financial Inclusion
• Macro prudential supervision of the economy including the functioning of large financial conglomerates
• Coordinating India's international interface with financial sector bodies like the Financial Action Task Force (FATF), Financial Stability Board (FSB)and any such body as may be decided by the Finance Minister from time to time.

FSDC was formed to bring greater coordination among financial market regulators.With the rupee continuing to remain volatile, the Foreign Currency Non Resident (FCNR) account can be a good option for Non Resident Indians (NRIs) looking to invest in India without worrying about currency risks.