BackRupee slide pushes up NRI deposit rates
The high rates are mostly available on deposits with a tenor of three years or more
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The Indian rupee fell to a fresh low of 65.56 against the dollar on 22 August. The rupee downtrend is not new; in fact its decline against the dollar started in the second half of 2011 when it was trading at around 45 per dollar. Since then a combination of factors, including our domestic economic shortcomings (mainly the high current account deficit or CAD), the growth pick-up in the US, inevitable pull-back of quantitative easing and a generally stronger dollar has dealt a brutal blow to the rupee. The timing of optimism in US growth couldn’t be worse for India as we deal with an unacceptably high CAD at 5.07% of gross domestic product for the quarter ended March 2013, according to Bloomberg data, and slowing earnings growth for corporate India. In the past few weeks, the rupee slide has gained uncomfortable momentum. In three months, it has depreciated 14.17% and in just the last week it fell 4.93%.
The government is taking a number of steps to try and stabilize the situation. Some of the obvious options to help achieve this include encouraging more non-resident Indian (NRI) deposits, reducing imports of precious metal such as gold and tightening dollar outflow. In a bid to encourage the value and volume of NRI remittances, the Reserve Bank of India (RBI) has hiked interest rate for foreign currency non-resident bank (FCNR) (B) deposits and deregulated non-resident external or NRE accounts. RBI has also limited the amount a resident Indian can remit to another country under the Liberalised Remittance Scheme (LRS) to $75,000 a year.
Hike in FCNR (B) deposit rates
On 14 August, RBI increased the rate on FCNR (B) deposits with a maturity of three to five years by 100 basis points or bps. A basis point is a hundredth of a percentage point. Interest rate on FCNR (B) deposits is fixed on the basis of the London inter-bank offered rate (Libor)/swap rate prevailing on the last working day of the previous month. The Libor/swap reference rate is published on Foreign Exchange Dealers’ Association of India’s (Fedai) website.
So the new rate for maturity periods of three to five years will be Libor/swap plus 400 bps. The effective Libor/swap for three-year dollar account is 0.776. With 100 bps up, the interest rate for three-year deposit is up 4.78% from 3.78%. Interest rates of deposits with maturity period other than three to five years remain unchanged.
FCNR(B) accounts are typically meant for NRIs who want to maintain a deposit in India in a foreign currency without taking exchange rate risk. These deposits are maintained in US dollar, pound, euro, Australian dollar, Canadian dollar, yen, Swiss franc, New Zealand dollar, Swedish krona and Danish krone.
Deregulation of NRE deposits
This is the most widely used account, mainly because a majority of NRIs send money to their families, who can withdraw from the account in India in rupees. RBI has directed that banks are free to offer interest rates without any ceiling on NRE deposits with maturity of three years and above. These instructions will be valid up to 30 November 2013, subject to review. Earlier, the rates couldn’t be higher than domestic rupee deposits. Post this announcement, IDBI Bank Ltd raised NRE term deposit rates to 9.50% for three-five year maturity period. Federal Bank Ltd also raised NRE term deposit rates to 9.00% for a tenor of three years and above.
Limit on remittance outside India
All resident individuals, including minors, were earlier allowed to remit up to $200,000 per financial year for any permissible current or capital account transaction or a combination of both. But now the outflow has been restricted to $75,000.
The RBI circular states that while current restrictions on the use of LRS for prohibited transactions, such as margin trading and lottery would continue, use of LRS for acquisition of immovable property outside India directly or indirectly will, henceforth, not be allowed. Earlier, resident individuals could acquire and hold immovable property or shares or debt instruments or any other assets outside India without RBI’s prior approval.
What it means for you
It’s definitely good news for NRI depositors for whom safety is the priority and those who are willing to lock-in for at least three years. “If you have a definite end use and predetermined time in mind, it would be better to opt for deposits and avoid taking any interest rate risk," said Suresh Sadagopan, a Mumbai-based financial planner. Moreover, there is no income-tax or wealth tax applicable on interest from NRE and FCNR (B) deposits.
But some experts point at better options. “The condition of minimum investment horizon of three-five years is detrimental to attract NRIs as there are better options already available. Under the current macroeconomic scenario, NRIs should opt for short duration funds from the international debt fund market. Besides better returns than fixed deposits, they also give liquidity," said Rajat Dhar, managing partner, Cogent Advisory, a wealth management and advisory firm.
The LRS restriction will have an impact on property buying abroad. “$75,000 looks sufficient to cover the needs of most individuals who send money outside India. But it will have a major impact on a set of people who have been planning to buy property overseas," said Vishal Dhawan, a Mumbai-based financial planner. According to an RBI circular issued on 12 August, in FY12-13, outward remittance under LRS was $1.2 billion. Out of this, only $77.7 million was directly used to purchase immovable property abroad. But these numbers don’t give a true picture as immovable properties were bought via indirect routes too.
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