Home >opinion >online-views >Banks increase FCNR rates by up to 175 bps

Last week, the Reserve Bank of India (RBI) raised the interest rate ceiling on FCNR (foreign currency non-resident account) deposits across maturities. The apex bank increased the interest rate on FCNR deposits with maturity of one year to less than three years to LIBOR (London inter-bank offered rate)/swap plus 200 basis points from LIBOR/swap plus 125 basis points.

RBI raised the interest rate ceiling on FCNR (foreign currency non-resident account) deposits across maturities. By Bloomberg

Typically, FCNR accounts are used by non-resident Indian (NRI) investors who do not want exchange rate risk to their funds. In these deposits, funds can be maintained in the five specified currencies. These deposits can be opened in six foreign currencies—US dollar, pound sterling, euro, Japanese yen, Australian dollar and Canadian dollar. So if you make your deposit in US dollars, the deposit will maintain the funds in US dollars itself.

Moreover, if a person receives remittance in any currency other than the ones mentioned above, these deposits convert it into one of the designated currencies chosen.

Rate hikes

In fact, after the apex bank increased the ceiling on FCNR deposit rates, banks were quick to hike their offerings. For instance, IDBI Bank Ltd increased its FCNR interest rate by up to 175 basis points. Currently, the bank offers 3.05% as for deposits for a tenor between one year and less than two years. ICICI Bank Ltd also increased its rates for one-two-year tenors by 75 basis points; its rates for three-five-year tenors have been increased by 175 basis points. Kotak Mahindra Bank Ltd, Federal Bank and State Bank of India have also hiked their rates on FCNR deposits. Federal Bank has increased its rates in the range of 75 basis points to 175 basis points.

Do these deposits work for NRIs?

Banks are offering increased rates on such deposits, but does that mean they are the best place to park funds for NRIs. Suresh Sadagopan, certified financial planner, Ladder 7 financial advisory, a Mumbai-based financial planning firm, says, “At this point of time, NRE (non-resident external) deposits are giving a very attractive rate of 9-9.50%. In fact, NRE deposits are also tax-free so we advise our clients to park funds in NRE deposits."

NRE domestic accounts are for people working abroad and unlike FCNR deposits, here the funds are converted into Indian rupees. FCNR accounts may work more for investors who wants to escape exchange rate risk.

bindisha.s@livemint.com

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