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Deregulating interest rates is always good news for non-resident Indians (NRIs) as they can park their savings in attractively valued term deposits in India.

The Reserve Bank of India (RBI) recently removed the cap on interest rates on foreign currency non-resident bank, or FCNR(B), and non-resident external (NRE) account deposits for the period from 7 July to 31 October. The central bank’s move is aimed at attracting dollars into the country to check the rupee’s fall.

Rate hikes on FCNR(B) deposits in the last one week have made them quite attractive vis-a-vis term deposits in other countries. For instance, the annual percentage yield (APY) of certificates of deposits, or CDs—the US equivalent of fixed deposits in India, of the top five banks by total assets currently hovers around 0.02%-1.01% for 3-year deposits. Deposits maturing in 12 months offer rates at 0.02%-0.10%. In comparison, FCNR(B) deposits locked till 4 November with 12 months maturity and 36 months maturity will yield 2.5-4% and 2.88-3.8%, respectively.

 

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What is FCNR and NRE?

FCNR(B) is a term or fixed deposit that allows NRIs and Persons of Indian Origin (PIOs) to park their foreign income in Indian banks in the currency of their resident country and earn interest on it. “As the principal and the interest are transferred in the currency in which the account is maintained, there is no loss of exchange and the accounts are protected against forex rate risks," said Adhil Shetty, CEO, BankBazaar.com.

FCNR(B) deposits can be made in currencies such as the US dollar , British pound sterling (GBP), euro, yen, Australian dollar (AUD), Singapore dollar (SGD) and Canadian dollar, among others. In an NRE deposit, the currency deposited from overseas is converted to the rupee.

“NRE deposit is akin to an investor converting foreign currency, most notably the dollar, into rupees (INR) and then making a fixed deposit in the Indian currency," said Manoj Trivedi, co-founder, Jama Wealth, a Sebi Registered investment advisor.

Indian residents can also open and maintain these deposits as joint holders with an NRI relative, but as the money has to come from outside India, Indian joint account holders can’t make deposits.The money from both types of deposits is repatriable

What is the change?

Reference rate for FCNR(B) deposits is overnight Alternative Reference Rate (ARR), which is published by Financial Benchmarks India (FIBL) once every month. As per RBI guidelines, banks can offer up to 250 basis points (One basis point is 0.01%.) and 350 basis points for deposits with maturity of one year to less than one years and three years and up to five years, respectively, over and above the ARR. For NRE deposits, interest rates cannot be higher than the rates being offered by the banks on comparable domestic rupee term deposits.

The RBI has removed these guidelines till 31 October. “This will apply only on the incremental deposits booked during the allowed period," said Shyam Mani, head-SME & NRI banking, CSB Bank.

“Banks are not required to maintain CRR and SLR on incremental FCNR(B) and NRE deposits in this period. The benefit of this is proposed to be passed on to the customers by means of better interest rates," said Surinder Chawla, head-branch and business banking, RBL Bank.

Some banks have increased rates on FCNR(B) deposits by 10-110 bps (see table). At the time of filing the story, only Indian Overseas Bank had hiked interest rate on NRE term deposits by 10 bps across all tenors, with the revised interest rates in the range of 5.50-5.70%.

Should you invest?

Rates locked during the four-month window on new deposits will be for the entire tenure. Also, interest earned from these deposits is exempt from tax in India. Take note that these deposits also carry a penalty of 0.25-1.0% on premature withdrawal and no interest is paid if deposits are withdrawn before one year.

Trivedi said investors should calculate the returns on NRE deposits after factoring in the conversion loss and change in the exchange rate. “Say, the current USD/INR exchange rate is 80. An NRI converts $10,000 into INR at 80, which works out to 8 lakh. Assuming that the NRE deposit earns interest rate at 5%, this amount grows to 8.4 lakh. Meanwhile, in one year, say, the rupee has depreciated to 82. At the depreciated rate, 8.4 lakh is now equal to $10,244, instead of $10,500 at 80 conversion rate. In other words, the NRI investor earns a return of 2.44% in dollar terms. This is advantageous to the depositor if, during the period when the NRE deposit was made, the interest rate on a 1-year USD deposit rate is less than 2.44%."

Shetty said depositors should choose a strong scheduled commercial bank to park their funds. “The deposit insurance covers accounts for only up to 5 lakh, which comes to approximately $6,300 or £5,300, which is low," he said.

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