I already have!

Important: From now on, my website's new address is

"mrunal.org". Although previous links, email subscription and
bookmarks will continue to work same as well.

1.What is FCNR?
2.Example SBI FCNR
3.What does SBI do with foreign currency?
4.Why is FCNR in News?
5.Implication of FCNR interest Rate hike

What is FCNR?
Foreign Currency Non-Resident (FCNR) scheme was
launched by RBI in the early 1990s.
It allows NRIs to make fixed Deposits (FD) in Indian Banks,
in Pound Sterling, US Dollar, Japanese Yen, Euro etc.
They dont need to convert their foreign currency into
rupees, just directly deposit foreign currency in Indian
Banks.
They dont need to pay income tax on the interest earned in
such account.
RBI decides the upper ceiling on interest rate to be paid on
such deposits.
Minimum maturity at 1 year, max is 5 years.

 Example SBI FCNR. You can read its terms, conditions and
features by clicking Me

What does SBI do with foreign

currency deposits?
NRI deposits his hard earned dollars$ into SBI account.
SBI gives these dollars as loans to Indian Importers, who
have to make payments in dollars for the importing raw
material, machinery and goods from foreign countries.
SBI also gives these dollars as loan as pre-shipment credit
to Indian Exporters. Because theyve too may need to
import some raw material from third country, also for paying
the transport cost to ships etc.
In short, SBI (or any Indian Bank), takes dollars from NRIs in
FCNR account and gives it as loans to Indian businessmen
for import/export.
Same thing for Yen, Pound, Euro etc. (Because NRI can
deposit those currencies as well and those Indian
businessmen may also need Euro/Yen for making special
purchases from particular country.)

Why is FCNR in News?

As usual, Rupee is weakening against dollar.
On 4th May 2012, the exchange rate was $1=53.** Rupees.
RBI had to do something immediately to stop the further
downfall of Rupee against Dollar, so RBI chief increased

the upper ceiling of FCNR interest rate. Now Indian banks

can offer even higher interest rate on FCNR deposits.

Implication of FCNR interest Rate hike

Currently Citibank USA offers only 0.05% interest rate on
savings account! (does it sound ridiculously low? Well,
these rates are given on the official page of Citibank USA!
Compared to that, Bank of Baroda's FCNR interest rate on
dollar deposits is around 3 to 4%. Now theyll increase the
interest rate even higher, after RBI increased the ceiling.
So, the NRIs will find it even more attractive to park their
dollar-savings in Indian banks rather than in American
banks.
This Means, Supply of dollar increased for those Indian
banks.
They can loan these dollars at to Indian importers. (more
money supply =more liquidity = loan-interest rates go
down).
Thus Demand of Dollars decrease @Forex market,
because now you can borrow dollars from SBI @ a lower
cost compared to what SBI used to charge earlier. So no
need to run to Forex agents.

Imaginary example:
Year 2001
interest given to NRI on savings deposit: 3%
loan interest charged from businessmen: 6%

Year 2002
interest given to NRI on savings deposit: 4%
loan interest charged from businessmen: 5.5%
It seems the profit margin declined in second case, isn't it? But
the "volume" of incoming money has increase and so will the
volume of business.
Besides, it takes only one troubled bank to reduced its loan
interest rate, and the other banks will be forced to reduce their
loan-interest rate as well, to stay competitive.
Then why didnot the said troubled bank reduce its loan interest
rate earlier? because earlier its incoming NRI-deposits were low
due to FCNR limit so they didnot have enough "raw-material" to
reduce the sales price and yet run operation smooth.
Demand of dollar decreases from open Forex market=
rupee strengthens.
So instead of going down to $1=54 Rs, now rupee will trade
@$1=52Rs or lower
Although its not that linear and immediate, takes some time
for the laws of supply and demand to show effects and then
rupee will start strengthening again.