Between March and May this year, the rupee had a rough few months. Tensions in West Asia pushed crude oil past $100 a barrel. Foreign investors pulled out over \u20b955,000 crore from Indian stocks in May alone. On 19th May, the rupee slid to a record low of near 96.6 against the dollar.<\/p>\n
This wasn\u2019t unfamiliar territory for the RBI. It had seen a similar script play out in 2013, during the taper tantrum (when the US Federal Reserve withdrew its monetary stimulus program). Back then, it reached for a specific tool to pull dollars back into the country and steady the rupee. In June this year, facing a similar squeeze, it reached for the same tool again.<\/p>\n
This scheme is built exclusively for NRIs. So Resident Indians, can\u2019t invest in this scheme. But if you have family abroad, this is worth telling them about, since it could mean a meaningfully better return on dollars they already hold.<\/p>\n
Even if nobody in your circle qualifies, it still helps to understand this.\u00a0A more stable rupee means cheaper imports and steadier inflation, and both eventually show up in your own monthly budget.<\/strong><\/p>\n
What is This Scheme, Exactly<\/h2>\n
\n
FCNR(B), or Foreign Currency Non-Resident (Bank) account, is a fixed deposit that NRIs can open at an Indian bank in a foreign currency, usually US dollars.<\/div>\n<\/div>\n
They deposit dollars, earn interest in dollars, and get dollars back at maturity. The rupee doesn\u2019t enter the picture at any stage.<\/p>\n
This account has existed for years, but it\u2019s built exclusively for NRIs, OCIs and PIOs.\u00a0Resident Indians cannot open one, so think of this as something to explain to family abroad rather than act on yourself.<\/strong><\/p>\n
FCNR(B) Key Details<\/h2>\n
\n\n
\n<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n
Why This Scheme is Genuinely Attractive For NRIs<\/h2>\n
\n
Most fixed income options for NRIs involve a trade off somewhere, either a lower interest rate or a currency risk. This scheme is unusual because neither apply here.<\/strong><\/div>\n<\/div>\n
Interest is tax-free in India (no TDS in India but it may be taxable in the residence of the NRI), and both principal and interest can be freely repatriated. Since the deposit stays in dollars throughout, there\u2019s no conversion risk either.<\/p>\n
It\u2019s also worth comparing this to other dollar debt options. US Treasuries (US Bonds) currently yield close to 4.4-4.5%.<\/p>\n
\n\n
\n<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n
What Rates Are Banks Offering?<\/h2>\n
\n\n
\n<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n
How The RBI Made 7% Possible<\/h2>\n
\n
To see why a 7% dollar deposit is unusual, it helps to know what used to stand in the way.<\/div>\n<\/div>\n
When a bank takes in a dollar deposit, it usually doesn\u2019t let those dollars sit idle. It converts them to rupees and lends that money out in India, since that\u2019s where the loan demand is.<\/p>\n
The catch: the bank has promised to hand back dollars, not rupees, at maturity, three to five years later. If the rupee weakens meanwhile, the bank needs more rupees to buy back the same dollars, and that gap is a real cost.<\/p>\n
To protect against this, banks buy a hedge, essentially a contract that locks in today\u2019s exchange rate for a future date.\u00a0This hedge isn\u2019t free. It typically costs a bank 2 to 3.5% every year, and that cost eats directly into the rate it can offer you.<\/strong><\/p>\n
On 5th June, the RBI announced a plan to remove this cost altogether, for a limited window.<\/p>\n
Here\u2019s how the swap works, using a simple example: an NRI in Dubai opens a $100,000 FCNR(B) deposit with SBI for 5 years.<\/p>\n
\n\n
\n<\/picture>\n
\n
<\/div>\n<\/div>\n<\/div>\n<\/figure>\n<\/div>\n
Because the exchange rate is locked at both ends of the swap, the bank carries zero currency risk on this deposit. That saved hedging cost is exactly what lets it offer 6-7% instead of the usual 3.5-4%.<\/strong><\/p>\n
The Leverage Add-On<\/h2>\n
\n
Some banks, led by SBI, are also offering a leveraged version. Here, the NRI\u2019s deposit becomes collateral for a Standby Letter of Credit, letting them borrow a much larger sum, at 5x to 9x their original deposit, and invest all of it into a fresh FCNR(B) deposit.<\/div>\n<\/div>\n
This part was murky when the scheme first opened, but the RBI has since cleared it up.\u00a0The RBI issued FAQs explicitly confirming that Indian banks, including their overseas branches, can extend loans to non-residents and issue SBLCs against these deposits.<\/strong><\/p>\n
![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!r8XO!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fd9e19643-07a5-4bcb-8f4c-2f2632065c58_1208x1339.png\")
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!gC62!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1445f622-3d7a-4702-86cf-8d8529409376_785x542.png\")
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!5BEO!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1daa37a9-02aa-4063-97c9-58c3272de1db_1210x1026.png\")
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!xTbx!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F4f22d569-b3a7-4421-9f45-cba796a2006f_940x794.png\")
<\/picture>\n\n<\/div>\n<\/div>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!r8XO!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fd9e19643-07a5-4bcb-8f4c-2f2632065c58_1208x1339.png)
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!gC62!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1445f622-3d7a-4702-86cf-8d8529409376_785x542.png)
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!5BEO!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1daa37a9-02aa-4063-97c9-58c3272de1db_1210x1026.png)
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!xTbx!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F4f22d569-b3a7-4421-9f45-cba796a2006f_940x794.png)
<\/picture>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!BiSN!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F70208c8e-6e26-45ff-bb8b-b7374e8e4cba_832x600.png)
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!byPz!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F490a98b9-069e-45e1-b9a6-c5b79962b39a_1240x1048.png)
<\/picture>\n<\/div>\n<\/figure>\n<\/div>\n