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A new record has been made on the front of Indian banking system and foreign exchange reserves. Non-resident Indians (NRIs) have deposited dollars and other foreign currencies in large quantities in the Foreign Currency Non-Resident (Bank) i.e. FCNR(B) accounts of Indian banks. According to the latest data from the Reserve Bank of India (RBI), there has been a huge jump of almost 7 times (678.2%) in NRI deposit inflows on an annual basis in the April-July period of the current financial year. This inflow has increased to a record $36.24 billion (about $36.24 billion).
Experts consider this to be the biggest turn in NRI deposits in the last decade, which has played an important role in strengthening the rupee and taking the country’s foreign exchange reserves to new heights.
There is no coincidence behind this huge investment from NRI investors, but a well-thought-out policy strategy of the Reserve Bank of India (RBI):
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RBI’s Special Swap Window (Concessional Swap Facility): The Reserve Bank launched a special FCNR (B) swap window for banks, under which banks can raise dollars from NRIs and swap them with the RBI without any currency hedging cost (Zero Hedging Cost). The funding cost of banks came down significantly as the cost of hedging (which used to be around 3% to 3.5%) was borne by the RBI.
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Jump of 200 to 300 basis points in interest rates: Banks directly passed on the benefits of reduced costs to customers. Indian banks have raised interest rates on FCNR (B) deposits from 3.5%-4%. 6% to 7.10% Made it till.
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CRR and SLR Rebate: The central bank exempted banks from the mandatory Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) conditions on the funds raised under this special window, which gave additional scope to banks to pay higher interest.
This offer proved to be extremely attractive for Indian origin investors living abroad for several key financial reasons:
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Zero Exchange Rate Risk: The biggest feature of FCNR(B) account is that in this the depositor does not have to bear any risk of conversion into rupees. If an investor has deposited US$100,000, on maturity he gets back both the principal and interest in dollars only.
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Higher returns than US Treasuries and yields: Treasury bond yields in the US were hovering around 4.25%-4.5%. At the same time, Indian banks (especially small finance banks and some private banks) offer dollar deposits for a period of 3 to 5 years. 6.5% to 7.10% It offered assured returns of up to Rs.100 crore, which was much higher than the global markets.
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100% Tax Free Returns in India: Under Section 10(15) of the Income Tax Act, NRI depositors do not have to pay any tax in India on the interest received on FCNR (B).
After RBI’s move, government, private and small finance banks increased the rates drastically:
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Small Finance Bank: AU Small Finance Bank offered the highest return of up to 7.10% on 3 to 4 year dollar FD.
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Private Sector Banks: ICICI Bank and Yes Bank offered rates ranging from 6.50% to 6.60%, while HDFC Bank and Kotak Mahindra Bank offered interest ranging from 6% to 6.15%.
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Public Sector Banks: State Bank of India (SBI) and Punjab National Bank (PNB) fixed the interest on deposits of 3 to 5 years at 6% to 6.10%.
According to financial experts, the Reserve Bank took this step on the lines of its historical model of 2013. In 2013, when the then Governor Raghuram Rajan opened the FCNR swap window to arrest the rupee’s fall, there was an inflow of about $34 billion into the country. Similarly, this time too the inflow of foreign currency has given strong support to the Indian Rupee amid international instability and has helped in taking the foreign exchange reserves to historical levels.