Leveraged FD MAY be coming for NRIs – RBI Announces USD/INR Swaps

Extreme Risk Aversion due to Corona virus (COVID-19) has impacted all financial assets drastically with global market indices losing 30%+ in less than a month, gold touching Rs. 45,000 and emerging market currencies experiencing extreme pressure. Also in India, FIIs are selling big time and taking money (USD) out of India and exchange rate touching 74.34/$ – close to its all-time low of 74.48 in October 2018.

While The Reserve Bank of India (RBI) has reserves of $487 Billion, there is constant pressure on the INR/USD rate. To provide liquidity to the forex market, RBI has announced US Dollar sell/buy swaps of 6 months on March 12, 2020 https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49501. The swaps will be conducted through the auction route in multiple tranches, first tranche being $2  Billion on March 16, 2020. Depending on the USD requirement, RBI will come out with more such auctions.

Swap Tenor
RBI has announced 6 month US Dollar Sell Buy Swaps as RBI thinks Covid-19 effect is a short term effect and would be over within 6 months. If there is not much interest for 6 month swap or if the Covid-19 pandemic persists and if there is an intense pressure on exchange rate, RBI could decide to increase the swap tenor from 6 months to 1 year or more.

What this means for NRIs:
If RBI decides to increase the tenor of swap to 1 year or more (upto 5 years), it could result into another round of Leveraged FCNR deposit opportunity for NRIs as the FCNR FD term is minimum of 1 year and maximum of 5 years. And, banks may come up with schemes offering Leveraged FCNR deposits with attractive returns to NRIs.

Please review my earlier blog on Leveraged FCNR deposit to understand the product, risks and return. While interest rate won’t be that high as RBI has not fixed the swap but is auctioning the same so the banks that offer higher premium will succeed and higher premium to RBI means lower return to investors.

In addition, NRIs also needs to be careful and consider following:

1. Review the Risks associated with Leveraged FCNR FDs on the blog and review comments.

2. The current swap window is only 6 months. As minimum term for FCNR FD is 1 year, RBI may not come with swap of higher tenor and banks may not come with leveraged FCNR deposits.

3. The bank may be pricing in such a way that the swap window is more beneficial to the bank than to an investor; e.g. bank make more money in processing or financing charges and an investor only get marginal benefit.

4. The creditworthiness and capacity of bank is to be checked. Earlier, many NRIs could have leveraged FCNR FDs tied up with Yes bank. NRIs should inquire about the banks – both domestic and international involved in the transaction.

5. And, check the fine print of the contact.

What should NRIs do?
If everything goes as expected – RBI increases tenor of USD INR sell buy swap, banks come up with leveraged FCNR FDs, NRIs get more benefit in terms of higher interest rates, it could be the great opportunity for NRI investors. Just hope for the best and be vigilant while evaluating and investing.   

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)

Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.
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