Foreign Currency Deposits

Foreign Currency Deposits

Subject : Economy

Section: External Sector

Context:

Banks revised their FCNR rates right after RBI relaxed the  norms and permitted them to raise fresh FCNR(B) and NRE deposits without reference to the extant regulations on interest rates with effect from July 7, 2022.

Concept:

Foreign Currency account:

• A Foreign Currency Account is an account held or maintained in currency other than the currency of India or Nepal or Bhutan.
• Major foreign currency accounts that can be opened in India by a resident individual:
  •  Exchange Earners’ Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorised Dealer Category – I bank i.e. a bank authorized to deal in foreign exchange.
    •  It is a facility provided to the foreign exchange earners, including exporters, to credit 100 per cent of their foreign exchange earnings to the account, so that the account holders do not have to convert foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs.
  • Resident Foreign Currency (Domestic) [RFC(D)] Account-are bank accounts that can be maintained by resident Indians in foreign currency.
    • These accounts are especially useful for Non Resident Indians (NRI) who return to India and would like to bring back foreign currency from their overseas bank accounts.
  • Resident Foreign Currency (RFC) Account- It is a savings account maintained in foreign currencies – USD and GBP – for NRIs who have returned to India and hold funds in foreign currency.
• Major foreign currency account held by non resident Indians:
  • Foreign Currency Non-Resident (FCNR) scheme-
    • It is a scheme introduced by the Indian government to help NRIs transfer funds into Indian banks.
    • Before 2011, FCNR allowed deposits in six currencies. In 2011, the Reserve Bank of India announced that banks could accept deposits for FCNR accounts in any currency that can be freely converted. 
    • FCNR accounts are term deposit accounts which are maintained by NRIs and PIOs in the form of foreign currencies.
    • Since the account is denominated in a foreign currency,depositors are not exposed to the risk of exchange rate fluctuations. 
    • The main benefit of an FCNR (B) account is that the principal amount and interest amount are tax-free and fully repatriable.
    • The account can be opened jointly (with residents and/or with non-residents).
    • Tenor -of 1-5 years (closed before maturity before completion of the minimum period of deposit)
    • Loans against the deposits are available in India both to the depositor and third parties at the request of the depositors. Banks also provide Loan against FCNR(B) deposits in Foreign Currencies also to the depositors only.

What is the difference between FCNR and FCNR B?

• FCNR B was introduced with an aim to replace the already prevailing FCNR scheme known as FCNR A where the foreign exchange risk was borne by RBI and subsequently by the Govt. of India.
• In 1993, the apex bank introduced FCNR (B), without exchange rate guarantee, to replace FCNR (A)
• All FCNR accounts today are FCNR (B) accounts.
• Generally, interest rates on Foreign Currency Non-Resident Bank [FCNR(B)] deposits are subject to ceilings of Overnight Alternative Reference Rate (ARR) In the case of NRE deposits, as per extant instructions, interest rates shall not be higher than those offered by the banks on comparable domestic rupee term deposits.