FCNR (B) Swap Window: Basics and Hype (it is just old wine in new packaging)..

There is much talk and discussion around how RBI’s new FCNR (B) swap facility has been a magic wand. Magic wand it has been as suddenly risks have disappeared.  But as this post argues this facility is nothing but an old wine in new packaging. In many ways it goes back to previous such measures when currency risks were taken away from these foreign inflows.

It worked in the past too and has worked even now. At times, policymakers have not really communicated that the magic wand was working, perhaps keeping a low profile.

What follows is an analysis beginning with basics of various types of NRI deposits, trends in each deposit and recent RBI window. It is quite detailed as the idea was to also explain things to myself and keep it for future references as well. So people will have to bear with the length of the post.

So how does one make sense of various NRI accounts/deposits? There are three such accounts/deposits:

  • NRO account: Stands for Non-Resident Ordinary account.
  • NR(E)RA: Non-Resident (External) Rupee Accounts. Started in 1970.
  • FCNR (B): stands for Foreign Currency Non-resident deposits. Why is it called FCNR (B)? B Stands for Banks and it is used as we earlier had FCNR (A) where the RBI bore the currency risk (more on this later). FCNR A started in 1975 and FCNR B in 1993. Just to break the suspense a bit. The recent FCNR (B) swap facility is nothing but a version of FCNR (A) facility of yesteryears.

So when do you open which account?

NRO account:

  • NRO as the same suggests is an ordinary account applicable to all residents staying abroad/NRIs.
  • Say one becomes an NRI. In that case, his bank account (savings/current/recurring/fixed) automatically becomes an NRO account. He uses it to continue making payments in India and also collect funds from transactions in India.
  • Or let’s ay If there is a resident who goes abroad but is still not an NRI. Then also he has an NRO account for receiving funds and making payments in India.
  • Or say a foreigner comes to India to work. He also opens an NRO account as salary account
  • This account is not repatriable except in for the expat and special conditions for Indian non-resident.

NRERA Account:

  • Now say the NRI wants to bring funds from abroad to India. This could be for investment purposes or any other. For this he opens an NRERA account as NRO cannot serve the purpose.
  • This account is fully repatriable.
  • The idea is to delineate the two accounts. The moment NRI brings his funds from NRERA to an NRO account, they cannot be repatriable. So have to be careful.
  • Again like a normal deposit account, this could be a saving/current/recurring or fixed deposit.


  • Say an NRI has an NRERA account but wants to keep his savings in foreign currency. So he can invest it as a term deposit taking FCNR (B) facility. This way he earns interest rates on his dollar money.
  • Unlike the first two, this is a foreign currency deposit. So NRI just invests his money and it is upto the bank to use the proceeds as in the case of normal deposits.
  • This is also fully repatriable.
  • It is for terms not less than 1 year and not more than 5 years
  • Six currencies allowed: USD, GBP, EUR, JPY, Canada Dollar and Aus Dollar.
  • RBI still sets rates for FCNR. On August 14, 2013 following rates
    (i) 1 yr – 3 yr maturity, ceiling rate of LIBOR/ SWAP + 200 bps,
    (ii) 3-5 years maturity LIBOR/ SWAP + 400 bps

Therefore the broad idea is this.

  • If you want to just maintain your rupee savings in India open an NRO.
  • If you want to bring your foreign savings in India and convert them in INR, open an NRERA
  • If you want to bring your funds in India but maintain the foreign currency, open an FCNR (B).

Now some other facilities/ regulations:

  • One can open joint accounts/ avail nomination facilities (just like normal deposit accounts)
  • Earlier these deposits also attracted CRR, SLR regulation. This was to treat them at par with Indian deposits. So you bring $1 of deposits, CRR of x% and SLR of y% would apply to NRI deposits too. From 14 Aug 2013, these regulations were eased. No CRR and SLR applied to new NRI deposits from this date.
  • Another thing is one can take loan against these deposits. The conditions are here.

More comparisons and understanding is here, here, here

Currency Risk:

  • NRO: with the depositor
  • NRE: with the depositor
  • FCNR: with the bank

This risk bit plays a crucial role. As currency risk remains with the bank, banks do not show as much interest in FCNR. Especially in times of rupee depreciation.

  • Say an investor deposits $100 to Bank A at an interest of 5%. Bank A brings it to India, converts at exchange rate @ Rs 50/$ and invests Rs 5000 somewhere at say 6%.
  • Now say exchange rate appreciates to Rs 40. In this case bank needs to bring Only Rs 4020, convert them to $ 105 and pay it back to the depositor.  This leads to profits for the bank.
  • However, if the currency depreciates to Rs. 60, then he will have to bring Rs 6030. This is more than Rs 6000 bank made on the deposit. So a loss.
  • Therefore, in depreciation kind of situation banks reluctant to encourage NRI deposits.
  • Banks also have to hedge these currency risks by buying forward premiums. Forward premiums come at a cost. So, the banks have to balance their costs and benefits accordingly. So apart from 5% interest, banks will also have to make cover for forward premium. They would only bring FCNR B funds if cost of deposit + cost of forward premium < return on deploying the deposit.
  • In the above example only if forward premium is less than 1% it makes sense for banks to go for FCNR B.
  • In reality, cost of deposit + cost of forward premium is usually less than return on deploying the deposit. The numbers discusses later will show this.

So how do numbers look?

Not surprisingly, it is NRERA which forms bulk of the NRI deposit flows.

  • Till Sep-13, we had total NRI deposits outstanding at $68.9 bn with NRERA at $49.7 bn, FCNR at $ 19.2 bn and NRO at $9.1 bn.
  • From Jan-2012 onwards, we have seen huge surge in NRERA account on account of deregulation of interest rates in Dec-2011 (mentioned above). In Dec-11, NRERA was $25.4 bn which zoomed to $ 28.9 bn in Jan-12. Banks have added nearly $ 24.2 bn in the period Jan-12 and Sep-13. One sees a sharp decline in month of Aug-13 when NRERA declined by $3.9 bn tracking uncertain Indian economy outlook.
  • In case of FCNR B, we see a more low-beat growth. In the period of Jan-12 to Aug-13, Till Aug-13, there was actually net outflow of $0.26 bn. This was on account of banks unwilling to bring the dollars as there was high depre risk. The above formula (cost of deposits + forward premium < cost of return on deposits) was not working out. There was high risk of expected depre as well.
  • In Sep-13, banks mobilised FCNR B worth $4.1 bn, tracking RBI’s change in policies to bring more FCNR B. There was little choice really as NRERA had started exiting tracking both Fed taper, depreciating rupee and Indian (un) economy.

RBI FCNR (B) Swap or plain subvent/ RBI FCNR (B) or Back to FCNR (A)?

So what did RBI do? Well it took the currency risks out for banks for getting FCNR (B):

  • Banks which mobilized FCNR B brought them to RBI like the past. This time however, RBI also promised to pay the same amount of dollars for 3.5% interest on maturity.
  • So say a bank brings $100 @ 5% for 5 years. It gives $100 to RBI @ say Rs 65/$ and invests Rs 6500 somewhere. After 5 years, it comes back to RBI, gives Rs 6500 + 3.5% premium to RBI.  It gets its $100 from RBI and pays back depositor $105.  If you note, both the cost of forward premium and currency risk has been done away and replaced with a fixed cost of 3.5%.
  • Why 3.5% and not 2% or 5%?  I am not really sure about that. Need to check that.
  • Meanwhile the risk has come to RBI’s books. Say it buys at Rs 65 but what if rupee becomes 70. This will be a loss for RBI. Obviously it can become Rs 50 also leading to gains for RBI but losses for the bank. It is like playing hide and seek with currency risk.
  • To make the deposits sticky, RBI insists that deposits more than 3 years to only come under this window.
  • Then the scheme is only for USD deposits. RBI is not willing to take risks on other currencies
  • Therefore, in a way this so called new FCNR B scheme is just like the old FCNR (A) scheme where risks were on RBI’s books.
  • Also it is not really a swap facility but a subvention/subsidy of interest rates.  Banks which would have to pay a higher rate in markets for covering the currency position are getting a subsidy/subvent from RBI. It is like those several government schemes where borrowers pay a lower interest rate than market rates.

But then you call it FCNR (B) Swap window and make it sound so rosy and market centric. In reality it is pure intervention of the pre-1990 era.  Such are times when we have learnt to repackage old interventionist schemes.

Infact RBI could have regularly announced its gains under NRERA window as it is doing for FCNR now. Rupee could have been more stable then and maybe we did not need such market distorting policies.

More on NRI Deposits, forex assets and reserve money

  • One can also link this NRI deposit flow to forex assets and creation of reserve money.
  • When banks bring NRI depoits, this is capital inflow and is credited in BoP. It becomes part of forex reserves of RBI.
  • When RBI gets these deposits and gives banks rupees, it leads to creation of reserve money.
  • RBI says it has got around $ 22.7 bn under this window. However, an analysis of RBI’s forex and RM figures say, this money has still come in RBI accounts.
  • Foreign currency assets (part of foreign currency reserves) in beginning of Sep-13 was $ 247.4 bn and on 15-Nov-13 is at $ 255.9 bn. So just a rise of around $ 9 bn against an inflow of $ 22.9 bn of NRI deposits and some bit for FII too. Why?
  • Perhaps the reason could be reserve money. RM on Sep beginning was around Rs 15546 bn and on Nov 15 was Rs 16169 bn. This is a rise of around Rs 624 bn. This includes both buying of foreign assets ($9 bn is around Rs 567 bn @ Rs 63 average) and buying of G-Sec (Repo + OMO).
  • If RBI chooses to book all the forex assets it will lead to huge surge in RM which will have inflationary consequences. But then does RBI really have a choice but not book these FCNR on its forex and RM books?

What difference between Sovereign bond issue and so called FCNR B swap window?

Come to think of it there are no real differences..

  • In sovereign bonds issued in the past, government did the same thing. Took the currency risk away from the bonds.
  • Investors could invest in bonds with all currency risk borne by government/RBI.
  • Banks particularly SBI mobilized much of the money from these bonds.
  • Compare this to FCNR B Swap window. It is the same thing. Currency risk borne by RBI and banks have brought the funds to RBI.
  • Yes here the risk is borne by the banks, which is really different from sovereign guarantee in case of bonds. But without RBI subsidy, will banks be willing? Our data analysis above shows how banks have been reluctant to bring FCNR (B) all these months.
  • One difference though is unlike in bonds where you determine the size of issuance. In case of NRI deposits there is nothing like this unless RBI specifies a cap. Of course this has limitations as well as the larger the inflow, larger will the promised outflow.
  • Another difference is that sovereign bonds in the past were issued across different currencies at different interest rates. For this FCNR thing, it is just USD.

Overall, NRI money has mostly bailed us out. Whether it was 1991, 1998 or 2011-??. The policymakers have used the old wine of mobilizing NRI money and wrapped it under new packaging – bonds, deposits etc. It is not FII or FDI but NRI which which helps. In each the crucial element is taking the currency risk away.

Whether it is a crisis or policies to save from crisis, this “Time is never really different”. Same policies under different names with some stylized difference is what is there. Though each time the policymakers and experts make us believe so and we do as well.

Though, this time RBI could have tried swap lines with say Fed. It has been a huge success in advanced countries which tried it. After some initial use, they just worked as signals. I am not sure what are the costs and benefits of swap lines compared to this swap (subsidy) scheme…


2 Responses to “FCNR (B) Swap Window: Basics and Hype (it is just old wine in new packaging)..”

  1. AD Says:

    what is your advise to NRI’s for making FCNR B. Which currency is most viable, if one is converting say SGD to USD/GBP/AUD/INR for 3 years deposit.

  2. Naresh Babuta Says:

    Very informative and excellent explanation. Damn easy to understand such a difficult subject. Thanks for updating my knowedge.

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