Define forex swap window

Define forex swap window

Author: BestSkylink Date: 03.06.2017

Magic wand it has been as suddenly risks have disappeared. But as this post argues this facility is nothing but an old wine in new packaging.

In many ways it goes back to previous such measures when currency risks were taken away from these foreign inflows. It worked in the past too and has worked even now. At times, policymakers have not really communicated that the magic wand was working, perhaps keeping a low profile. What follows is an analysis beginning with basics of various types of NRI deposits, trends in each deposit and recent RBI window.

It is quite detailed as the idea was to also explain things to myself and keep it for future references as well.

So people will have to bear with the length of the post. More comparisons and understanding is here , here , here.

This risk bit plays a crucial role. As currency risk remains with the bank, banks do not show as much interest in FCNR. Especially in times of rupee depreciation. But then you call it FCNR B Swap window and make it sound so rosy and market centric. In reality it is pure intervention of the pre era. Such are times when we have learnt to repackage old interventionist schemes. Infact RBI could have regularly announced its gains under NRERA window as it is doing for FCNR now.

Rupee could have been more stable then and maybe we did not need such market distorting policies. Overall, NRI money has mostly bailed us out. Whether it was , or ??. The policymakers have used the old wine of mobilizing NRI money and wrapped it under new packaging — bonds, deposits etc.

It is not FII or FDI but NRI which which helps. In each the crucial element is taking the currency risk away. Same policies under different names with some stylized difference is what is there. Though each time the policymakers and experts make us believe so and we do as well. Though, this time RBI could have tried swap lines with say Fed. It has been a huge success in advanced countries which tried it.

FCNR swap deal: What it means for NRIs - Times of India

After some initial use, they just worked as signals. I am not sure what are the costs and benefits of swap lines compared to this swap subsidy scheme…. This entry was posted on November 27, at You can follow any responses to this entry through the RSS 2. You can leave a response , or trackback from your own site. Very informative and excellent explanation. Damn easy to understand such a difficult subject.

Thanks for updating my knowedge. You are commenting using your WordPress. You are commenting using your Twitter account. You are commenting using your Facebook account. Notify me of new comments via email. Create a free website or blog at WordPress. Entries RSS and Comments RSS. Mostly Economics This blog covers research work in Economics with focus on India. FCNR B Swap Window: Stands for Non-Resident Ordinary account.

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Non-Resident External Rupee Accounts. Why is it called FCNR B?

B Stands for Banks and it is used as we earlier had FCNR A where the RBI bore the currency risk more on this later.

FCNR A started in and FCNR B in Just to break the suspense a bit. The recent FCNR B swap facility is nothing but a version of FCNR A facility of yesteryears. So when do you open which account?

Say one becomes an NRI. He uses it to continue making payments in India and also collect funds from transactions in India. Then also he has an NRO account for receiving funds and making payments in India.

Or say a foreigner comes to India to work. He also opens an NRO account as salary account This account is not repatriable except in for the expat and special conditions for Indian non-resident. Now say the NRI wants to bring funds from abroad to India. This could be for investment purposes or any other. For this he opens an NRERA account as NRO cannot serve the purpose.

This account is fully repatriable.

define forex swap window

The idea is to delineate the two accounts. The moment NRI brings his funds from NRERA to an NRO account, they cannot be repatriable.

What is a swap? - MoneyWeek Investment Tutorials

So have to be careful. FCNR B Say an NRI has an NRERA account but wants to keep his savings in foreign currency. So he can invest it as a term deposit taking FCNR B facility. This way he earns interest rates on his dollar money. Unlike the first two, this is a foreign currency deposit. So NRI just invests his money and it is upto the bank to use the proceeds as in the case of normal deposits.

This is also fully repatriable. It is for terms not less than 1 year and not more than 5 years Six currencies allowed: USD, GBP, EUR, JPY, Canada Dollar and Aus Dollar.

RBI still sets rates for FCNR. If you want to just maintain your rupee savings in India open an NRO. If you want to bring your foreign savings in India and convert them in INR, open an NRERA If you want to bring your funds in India but maintain the foreign currency, open an FCNR B. This was to treat them at par with Indian deposits. From 14 Aug , these regulations were eased. No CRR and SLR applied to new NRI deposits from this date. Another thing is one can take loan against these deposits.

The conditions are here. More comparisons and understanding is here , here , here Currency Risk: Now say exchange rate appreciates to Rs This leads to profits for the bank. However, if the currency depreciates to Rs. This is more than Rs bank made on the deposit. Therefore, in depreciation kind of situation banks reluctant to encourage NRI deposits. Banks also have to hedge these currency risks by buying forward premiums.

Forward premiums come at a cost. So, the banks have to balance their costs and benefits accordingly. The numbers discusses later will show this. So how do numbers look?

Not surprisingly, it is NRERA which forms bulk of the NRI deposit flows. From Jan onwards, we have seen huge surge in NRERA account on account of deregulation of interest rates in Dec mentioned above. In case of FCNR B, we see a more low-beat growth. This was on account of banks unwilling to bring the dollars as there was high depre risk. There was high risk of expected depre as well.

There was little choice really as NRERA had started exiting tracking both Fed taper, depreciating rupee and Indian un economy. So what did RBI do? Well it took the currency risks out for banks for getting FCNR B: Banks which mobilized FCNR B brought them to RBI like the past.

This time however, RBI also promised to pay the same amount of dollars for 3. If you note, both the cost of forward premium and currency risk has been done away and replaced with a fixed cost of 3.

I am not really sure about that.

Currency Swap

Need to check that. Say it buys at Rs 65 but what if rupee becomes This will be a loss for RBI. Obviously it can become Rs 50 also leading to gains for RBI but losses for the bank. It is like playing hide and seek with currency risk. To make the deposits sticky, RBI insists that deposits more than 3 years to only come under this window. Then the scheme is only for USD deposits. It is like those several government schemes where borrowers pay a lower interest rate than market rates.

More on NRI Deposits, forex assets and reserve money One can also link this NRI deposit flow to forex assets and creation of reserve money. When banks bring NRI depoits, this is capital inflow and is credited in BoP. It becomes part of forex reserves of RBI. When RBI gets these deposits and gives banks rupees, it leads to creation of reserve money. Perhaps the reason could be reserve money. RM on Sep beginning was around Rs bn and on Nov 15 was Rs bn. This is a rise of around Rs bn. If RBI chooses to book all the forex assets it will lead to huge surge in RM which will have inflationary consequences.

But then does RBI really have a choice but not book these FCNR on its forex and RM books? What difference between Sovereign bond issue and so called FCNR B swap window? Come to think of it there are no real differences.. In sovereign bonds issued in the past, government did the same thing. Took the currency risk away from the bonds. Banks particularly SBI mobilized much of the money from these bonds. Compare this to FCNR B Swap window.

US Economic Statistics | OANDA

It is the same thing. Currency risk borne by RBI and banks have brought the funds to RBI. Yes here the risk is borne by the banks, which is really different from sovereign guarantee in case of bonds. But without RBI subsidy, will banks be willing? Our data analysis above shows how banks have been reluctant to bring FCNR B all these months.

One difference though is unlike in bonds where you determine the size of issuance. In case of NRI deposits there is nothing like this unless RBI specifies a cap. Of course this has limitations as well as the larger the inflow, larger will the promised outflow. Another difference is that sovereign bonds in the past were issued across different currencies at different interest rates.

For this FCNR thing, it is just USD. Share Email Reddit Print. Leave a Reply Cancel reply Enter your comment here Fill in your details below or click an icon to log in: Email required Address never made public. Send to Email Address Your Name Your Email Address document. Post was not sent - check your email addresses! Sorry, your blog cannot share posts by email.

inserted by FC2 system