FCNR- Reason for revision of FCNR Deposit rates by banks….

FCNR- Reason for revision of FCNR Deposit rates by banks….

What is FCNR?

FCNR term stands for Foreign Currency Non Resident Accounts, which are the deposits maintained by NRIs in a Foreign currency, which is subjected to both rate fluctuation and revision in interest rates paid on them.

How do banks determine the rate of interest paid on these FCNR deposits?

The interest rates payable on FCNR deposits are based on the London Inter bank offered rate or best known as LIBOR/ SWAP rates, quotes on the last working day of the previous month.  These  LIBOR/SWAP are the base ceiling rate which can be the cap on such payments, in terms of RBI guidelines.  To quote it otherwise, the FCNR(B) deposit rate which is in vogue since 1.9.2015 is related to the LIBOR rate of 31.8.2015 (EOD).  The rates are revised every month, and comes in to force w.e.f the beginning of a month.

FEDAI (Foreign Exchange Dealers Association of India)  releases the LIBOR/SWAP rate on its website viz FEDAI, which is the basis for all banks, for FCNR (B) deposits rates revision.
Linking of FCNR deposit rates to LIBOR/SWAP

If any one wants to borrow from the London Interbank market for a specific period, it is the LIBOR which is the yardstick to determine the rates for such borrowings.  These rates are published in the morning, for different timings numbering 15, and for around ten currencies.  Indian Banks use the LIBOR rate as the bench mark to determine the FCNR(B) deposits.  In terms of RBI guidelines, the interest rate on FCNR (B) for different maturity periods shall be as under:

  • For deposits of 1 year and <  3 years  =  LIBOR/SWAP +  200 BPS
  • For deposits of 3 years and < 5 years =  LIBOR/SWAP+   300 BPS

The deposit rates are rounded off to the nearest two decimal points for convenience of operation.

Effects of Linking

The linking of deposit rates to LIBOR/SWAP  brings a uniformity in the rates quoted in line with the global standards.  Further, since the FCNR (B) deposits are kept in Foreign Currencies like US dollar, pound, euro, Australian dollar, Canadian dollar, yen, Swiss franc, New Zealand dollar, Swedish krona and Danish krone, Forex Rate risk is avoided and is safe for NRIs to invest.

No Comments

Give a comment