From UPSC perspective, the following things are important :
Prelims level : FCNR Deposits
Mains level : India's forex reserves and its implications
The RBI’s 2013 FCNR scheme to buffer the rupee against steep declines and rebuild foreign exchange reserves is unlikely to prove fruitful in the current crisis as economic fundamentals are different.
What are FCNR deposits?
- Back in 2013, the RBI had offered to swap the U.S. dollars banks had raised via foreign currency non-resident (FCNR) deposits or foreign currency funding for rupees at concessional rates.
- A FCNR is a bank account for NRIs to maintain a Fixed Deposit account in India.
- This account allows one as an NRI to save money earned in the currency form of the country you’ve originally earned the money from.
- FCNR deposits can hold currencies like US Dollars, Pounds Sterling, Euro, Japanese Yen, Australian Dollars and Canadian Dollars.
- Interest on such deposits is exempt for income tax.
How do they operate?
- These deposit accounts are a term deposit account, not savings.
- Once can withdraw your money before the date of maturity, and there will be no charges, but the interest will not be paid until after a year is complete.
- FCNRs are just like what FDs are for resident Indians, except in foreign currency.
- They work as great investment options for NRIs to invest in the country for a start, before looking for other avenues in investments on the stock market.
- Because the money is being held in those currencies, the risk of exchange rate fluctuations is eliminated.
Why in news?
- Forex reserves have tumbled about $110 billion from a peak of $642 billion in September last year.
- A significant reason behind this is RBI’s currency market intervention.