The Reserve Bank of India has closed the Foreign Currency Non-Resident (bank) (FCNR (B)) scheme prematurely. The original deadline of September 30 has been moved up to August 30, citing an overwhelming amount of forex inflow under the scheme. As of August 13, forex of around $52.3 billion has been deposited in Indian banks.
The Foreign Currency Non-Resident (FCNR) scheme allows Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) to maintain fixed deposits in approved foreign currencies with banks in India. The tenure of the FD can range from 1 to 5 years. The interest rate is not subject to tax under Indian tax laws for non-residents.
This allows non-residents to use Indian banks while protecting their savings from the Indian rupee exchange rate fluctuations. It also allows them to access interest rates of 5.5 to 7 per cent per annum. This compares with a standard rate of 3 to 4 per cent, making it one of the highest-yielding risk-free dollar assets globally.
The RBI had launched the scheme on June 8 as an intervention to boost forex reserves and steady the Rupee from depreciation pressures. Domestic deposits had shrunk by 3.87 trillion from April 1 to June 15. Loan demand was expanding at 18.6 per cent while deposit growth lagged at 13.3 per cent. This prompted the central bank to launch the scheme, adding necessary liquidity back into commercial banks.
However, while initial liquidity was required, an unchecked flood of foreign money threatens to fuel inflation. The excessive surge in local liquidity can drive up asset prices and directly counter the intention of the policy.
The RBI had also guaranteed that if the Indian Rupee continues to weaken during the tenure, the central bank will absorb the risk. This means that the total payout the bank owes at maturity will expand if a continued flood of money comes in.
External Commercial Borrowings and Overseas Foreign Currency Borrowings will remain open till December 31, 2026.
