Foreign currency exchange risk in case of Non-Resident

Solution

Foreign currency non-resident deposits, usually abbreviated as FCNR(B) - the B stands for banks, are term deposits that non-resident Indians (NRIs) can open with banks in India. These deposits are denominated in foreign currencies permitted by the Reserve Bank of India.  This term deposit was started in 1993 and is available in tenures of one to five years. A term deposit lasts for a fixed period after which the amount has to be paid back with the interest being paid either periodically or lump sum at the time of maturity. As per May 2012 RBI circular, under the FCNR(B) scheme, banks have to pay an annual interest at a rate of LIBOR/Swap plus 200 basis points for terms between 1-3 years and LIBOR/Swap plus 300 basis points for terms between 3-5 years. This structure is decided by the RBI and banks use the LIBOR rate on the last working day of a month to fix the FCNR(B) rate for the following month. The currency risk is borne by the banks under the FCNR(B) scheme.