NRIs: Should you deposit your savings in foreign currency instead of rupee in India?
Brief lifting of RBI cap on interest growth rates of FCNR deposits raised overseas demand
Dubai: When a Non-Resident Indian (NRI) remits overseas income to his or her savings account in India, the foreign currency needs to be converted to Indian rupees - and this comes with a charge. But did you know that NRIs can benefit by depositing savings directly in foreign currency in India, without having it converted?
Doing so will also earn the Indian expat more interest on his or her deposits as opposed to when an Indian resident makes rupee deposits. Shouldn't that mean more NRIs should be making more deposits in foreign currencies? Yes, but that wasn't the case up until last year.
The reason being there was a Reserve Bank of India (RBI) cap on interest growth rates or yields made on foreign currency non-resident bank (FCNR) and non-resident external (NRE) account deposits, meaning there was a government-issued ceiling or limitation on how much your FCNR deposits could grow.
However, it was briefly lifted late last year, and since then growth rates on NRI deposits were being raised at several banks in India. Following the temporary removal of the RBI cap, interest rates on deposits - which were between 2.5 per cent and 3.5 per cent for FCNR deposits earlier - rose to between 3.30 per cent and 5.20 per cent for 1- to 5-year FCNR deposits made in US dollars, profiting NRIs worldwide.
While a NRE account is also a bank account opened in India to park a NRI's foreign earnings, the currency deposited from overseas in a NRE account is converted to the rupee. The key advantage with FCNR account is that there is no rupee valuation risk on such deposits as they are made directly in foreign currencies.
The depreciation risk associated with Indian rupee results in foreign currency denominated investment products like FCNR accounts giving higher returns compared to Indian rupee deposit accounts over the years, while offering a safe investment opportunity to NRIs.
NRIs are depositing more foreign currencies in 2023
The RBI move to relax the interest rate cap, among other measures taken, led to a surge in foreign currency or FCNR deposits in India. In total, NRI deposits made in India more than doubled to $7.9 billion (Dh29 billion) in 2023 from $3.2 billion (Dh11.8 billion) in 2022, with FCNR account deposits making up $2.4 billion (Dh8.8 billion).
“The RBI's move to attract FCNR funds from overseas investors at a time when the country’s forex reserves were down has evidently prospered given that the RBI added $46 billion (Dh169 billion) to its forex reserves until March 2023 - which is significantly high,” said India-based banking and tax researcher Brijesh Meti.
“When it comes to their savings, NRIs, particularly high net worth individuals (HNIs), have been well-positioned to benefit from the ‘interest rate arbitrage’ - i.e. the difference in interest rates of two countries, as they earn in global currency and can deposit in Indian banks in their earned global currencies without any currency risk.”
Can UAE-based NRIs make use of FCNR deposits in India?
An NRI receiving his salary in say, US dollars, can be kept with an Indian bank at higher rates at FCNR accounts. However, as mentioned above, with FCNR accounts in India, only deposits made in US dollar, British pound, euro, yen, Australian dollar, Singapore dollar and Canadian dollar are accepted.
So what about Indian expats with UAE dirhams looking to make deposits in FCNR accounts? “You can make an FCNR deposit by using the escrow of your bank, but currency conversion charges will apply,” said Dixit Jain, managing director Dubai-based tax advisory The Tax Experts DMCC.
“You remit UAE dirhams to your bank’s escrow, they then will convert to US dollar or any currency. You cannot directly deposit UAE dirhams in FCNR, and when you do using an escrow forex charges will be applied, which is why those depositing dollars will be benefit more than those who deposit dirhams.”
Given that FCNR accounts are used primarily for two reasons, firstly taxes are not incurred and secondly, forex charges don’t apply for the permitted currencies, UAE-based Indian expats stand to make benefit only in the first aspect. But regardless, FCNR accounts saw demand rise among NRIs because of the temporary removal of the RBI- issued cap, the experts reveal.
Key takeaways
The Indian central bank’s recent move, aimed at attracting US dollars into the country to stem the rupee’s steep devaluation last year, has succeeded as more NRIs worldwide took advantage of the higher interest growth rates offered for deposits made in foreign currencies in India.
NRIs in UAE can make use of the higher interest growth rates offered on FCNR deposits by discussing with the India-based bank that manages their NRE accounts, on developing an escrow to convert their UAE dirhams to the currency denomination that is offered with FCNR accounts.
You can make an FCNR deposit by using the escrow of your bank, but currency conversion charges will apply
While bankers have said overseas cash flows into bank deposits in India have increased due to facilities like the central bank easing limits on interest rates, there is a key pitfall to keep in mind when depositing foreign currencies in Indian bank accounts.
Although along with fixed rates of return, bank FDs have flexible terms that vary from 7 days to 10 years, potential investors are warned against the bank imposing a penalty rate on liquidating the deposits before the agreed-upon time, and the charge is deducted from the interest pay out.
In other words, with premature withdrawals of any currency deposit in India, you have to pay penalty in terms of reduction in the interest rate which you will get. Additionally, in case the deposits under FCNR are liquidated before completion of one year, no interest is payable