Banks are encouraged to get deposits from the foreign client against fixed interest paid to them and the risk of the exchange rate is mitigated by RBI. After receiving the deposits banks swap the fund with RBI for three years while paying a fixed cost. Banks hand over the dollar funds and receive the Indian currency under a swap arrangement. The redemption of foreign currency is a huge outflow that will shake the positioning of foreign reserves. RBI buys forward contracts to repay banks, but if the parties sold forward contract to RBI are unable to pay up, they may have to step into the open market to buy dollars. The benefit to FCNR (B) is that if they had deposited the amount and the dollar depreciates, they can make a good profit. Indian rupee has hit a new low this month against the US Dollar, which has risen 20 years high against a basket of major currencies. The Reserve Bank of India asked to increase FCNR(B) (Foreign Currency Non-Bank Deposits) and NRE (Non-Resident External) deposits. Also, the central bank announced foreign investors can invest in short term corporate bonds and government securities with fully accessible route. To curb current account deficit government has imposed import duties on gold and increased tariffs on petrol and diesel export. Measures announced by RBI: Thank you.
Great insights on the FCNB Deposits!
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