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The new RBI governor Dr. Raghuram Rajan announced a swap window to attract FCNR (B) funds that will help stabilize the INR, that is trending at close to record lows against the USD. RBIs move is expected to bring in around USD 10 billion to USD 15 billion through FCNR (B) deposits from NRI (Non Resident Indians). What is FCNR (B), what are the interest rates offered on FCNR (B) deposits and how will the swap window be effective in increasing USD flows? What is FCNR (B) FCNR (B) is a deposit scheme available for NRI.FCNR (B) stands for Foreign currency Non Residents (Banks). The primary feature of FCNR (B) deposits is that depositors do not face currency risk, the currency risk is borne by banks. Banks are allowed to accept FCNR (B) deposits up to a maximum maturity period of five years and only term deposits can be accepted. The FCNR (B) account can be denominated in any currency which is freely convertible. The principal and interest on FCNR (B) deposits are fully repartriatable and are not taxed in India. Loans up to Rs 1 crore can be given against FCNR (B) deposits. Banks have the freedom to fix the rate of interest chargeable on loans and advances against FCNR (B) deposits to the depositors with reference to their Base rate irrespective of whether repayment is made in INR or in Foreign Currency. Payment of interest on FCNR (B) deposits i) The interest on the deposits accepted under the scheme is paid on the basis of 360 days to a year. ii) The interest on FCNR (B) deposits is calculated and paid at intervals of 180 days each and thereafter for the remaining actual number of days. However, the depositor will have the option to receive the interest on maturity with compounding effect. Interest Rates on FCNR (B) Deposits Interest rate ceiling on FCNR (B) deposits for maturity period 1 year to less than 3 years is LIBOR/Swap +200bps and for 3 years to 5 years it is LIBOR/Swap +400bps. The LIBOR /Swap rates for FCNR (B) deposits are the rates published by FEDAI ( Foreign Exchange Dealers Association of India). FEDAI publishes monthly LIBOR/ Swap rate and the rates can be accessed from the FEDAI website (fedai.org.in). Rules and Regulation FCNR(B) account is regulated under FEMA act(Foreign exchange management act).On August 27th 2013 RBI has excluded FCNR(B) deposits from computation of Net Demand and Time Liabilities (NDTL) and for maintenance of CRR and SLR. How does the RBI swap window work? On 4th September 2013 RBI has opened a window to the banks to swap the fresh FCNR (B) dollar funds, mobilised for a minimum tenor of three years and over at a fixed rate of

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3.5% per annum for the tenor of the deposit. The swap window will be open until the 30th of November 2013. Banks taking in FCNR (B) deposits shy away from converting foreign currency into INR as they have to bear the risk of currency depreciation. The swap window at a fixed rate of 3.5% helps banks lock in their total cost of deposits and they can in turn invest in INR assets at higher rates. For example, a bank paying an interest rate of 5.7% on a five year USD FCNR (B) deposit, can go to the RBI and swap the USD to INR at a cost of 3.5%. The banks total cost of FCNR (B) deposits including hedging costs is 5.77% + 3.5% = 9.27%. The prevailing interest rate for a five year AAA rated corporate bond is around 10%. Banks can even lend to lower rated borrowers at much higher levels of yields. Will the swap window help in bringing in FCNR (B) deposits? The swap window for FCNR (B) deposits will give an incentive for banks to aggressively market their FCNR (B) deposits to NRIs. USD interest rates are extremely low at below 2% levels and NRIs will find it attractive to invest in FCNR (B) deposit schemes as they do not bear the risk of currency depreciation. Banks can earn a spread by arbitraging between USD and INR interest rates.

Note : Meetings by Appt. only

Regards Kirang Gandhi www.fpindia.in Independent Financial Planner M-9028142155