How NRIs can benefit from their NRE, FCNR accounts until October 31

The Reserve Bank of India (RBI) has recently removed the interest rate cap on Non-Resident Banks’ Foreign Currency Deposits, or FCNR(B), and Non-Resident’s External Accounts (NRE) for the period from July 7 to October 31. The central bank’s move aims to lure dollars into the country to curb the rupee’s fall.

The rate hikes on FCNR (B) deposits over the past week have made them quite attractive compared to term deposits in other countries. For example, the annual percentage yield (APY) on certificates of deposit, or CDs – the US equivalent of fixed deposits in India, of the top five banks by total assets currently hovers around 0.02% to 1, 01% for 3-year deposits. Deposits with a 12-month maturity offer rates from 0.02% to 0.10%. In comparison, FCNR(B) deposits locked in until November 4 with 12-month maturity and 36-month maturity will yield 2.5-4% and 2.88-3.8% respectively.

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What are FCNR and NRE?

FCNR(B) is a fixed term or term deposit which allows NRIs and Persons of Indian Origin (PIO) to deposit their foreign income in Indian banks in the currency of their country of residence and earn income from it. interests. “As principal and interest are transferred into the currency in which the account is held, there is no currency loss and the accounts are protected against exchange rate risks,” said Adhil Shetty, CEO of BankBazaar.com.

FCNR(B) deposits can be made in currencies such as US Dollar, British Pound (GBP), Euro, Yen, Australian Dollar (AUD), Singapore Dollar (SGD) and Canadian Dollar , among others. In an NRE deposit, the currency deposited from abroad is converted into rupees.

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

Indian residents can also open and maintain these deposits as joint holders with an NRI parent, but since the money must come from outside India, Indian joint account holders cannot make deposits. Money from both types of deposits is repatriable.

What is the change?

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

The RBI has removed these guidelines until October 31. “This will only apply to additional deposits booked during the permitted period,” said Shyam Mani, Head of SME and NRI Banking, CSB Bank.

“Banks are not required to maintain CRR and SLR on additional FCNR(B) and NRE deposits during this period. It is proposed to pass the benefits on to customers through better interest rates,” said Surinder Chawla, Head of Branch and Corporate Banking, RBL Bank.

Some banks have raised rates on FCNR(B) deposits by 10 to 110 basis points (see table). At the time of filing, only the Indian Overseas Bank had raised the interest rate on NRE Term Deposits by 10 basis points across all tenors, with revised interest rates ranging between 5.50 and 5.70%.

Should you invest?

Locked-in rates during the four-month window on new deposits will be for the entire term. Moreover, the interest earned on these deposits is tax exempt in India. Note that these deposits also carry a penalty of 0.25 to 1.0% for early withdrawal and that no interest is paid if the deposits are withdrawn before one year.

Trivedi said investors should calculate NRE deposit returns after taking into account conversion loss and exchange rate variation. “Let’s say the current USD/INR exchange rate is 80. One NRI converts $10,000 into INR at 80, which is equivalent to 8,000,000. Assuming the NRE deposit earns an interest rate of 5%, this amount increases to 8.4 million. Meanwhile, in a year, say, the rupee depreciated to 82. At the depreciated rate, 8.4 lakh is now equal to $10,244, down from $10,500 at 80 conversion rate. In other words, the NRI investor earns a return of 2.44% in dollars. This is beneficial to the depositor if, during the period 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 solid regular commercial bank to park their funds. “Deposit insurance only covers accounts up to 5 lakh which comes out to around $6,300 or £5,300 which is not much,” he said.

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