There is much debate around the decision by the Reserve Bank of India (RBI) to advance the closure of the Foreign Currency Non-Resident (Bank)—FCNR (B)—swap window by a month. Governor Sanjay Malhotra has maintained that the move was well thought-out, calibrated, prudent and a data-driven response to the forex environment.

So, what is FCNR (B) and what is the buzz around it? FCNR (B) deposits allow Non-Resident Indians (NRIs) to keep money in a bank in the form of foreign currency, the main attractions being that it offers tax-free interest as well as complete protection from exchange rate fluctuations.

In June, the RBI opened a temporary facility for banks to swap these foreign currency deposits, saying it would bear their full currency risk. This was done to attract foreign capital, stabilise the rupee against import cost pressures and bolster India’s dollar reserves.

High crude cost was driving inflation and putting pressure on the rupee. On May 20, the rupee had plunged to its lowest of 96.9 to the dollar.

But now, the central bank has decided to end the scheme in August, rather than the earlier deadline of September, citing an encouraging response to the move. RBI data showed that at least $52 billion of inflows had come through FCNR (B) deposits as of August 14, say media reports. However, what has fired up a debate is that the decision came just two weeks after Malhotra told the media there was “no proposal under consideration” to prematurely end the concession.

“While there may be valid reasons to justify an early closure [of the FCNR (B) scheme], the most likely reason could be that the target for FCNR (B) mobilisation has already been achieved with inflows at $57 billion.

And another $25-30 billion could easily flow in the remaining days of August, taking the total collections to around $85 billion,” says Soumya Kanti Ghosh, group chief economic advisor, State Bank of India, in a research note. “The balance of payment will be in surplus of around $50 billion with CAD (current account deficit) at 1 per cent of GDP.”

Malhotra, on his part, has said that the central bank had not taken a U-turn on the move; “it is rather a calibration”. In June, apart from agreeing to bear the hedging cost on fresh three-to-five-year FCNR (B) deposits, the RBI provided public sector units time-bound incentives to raise external commercial borrowings (ECBs).

ECBs are commercial loans raised by eligible resident entities from recognised non-resident lenders, and used by Indian corporations and public sector undertakings to access foreign capital. RBI expects to attract $80 billion in its three initiatives—FCNR (B), ECBs and overseas foreign currency borrowings—put together.

Source: indiatoday