RBI: The Reserve Bank of India (RBI) has made a generous gesture towards non-resident Indians (NRIs) by enhancing the regulations for Foreign Currency Non-Resident (FCNR) deposit accounts. This adjustment allows NRIs to potentially earn attractive interest rates of up to 7% by investing their foreign earnings or dollar savings in fixed deposits (FDs) in Indian banks. Given the scarcity of such high and secure returns on the dollar globally, this move is seen as a lucrative opportunity for NRI investors. Let’s delve into what FCNR entails and the implications it may have on individuals and the country’s economy.
What is an FCNR (B) account?
FCNR (Foreign Currency Non-Resident) is a type of bank account that can be opened by Non-Resident Indians (NRIs) or Persons of Indian Origin (PIO) in India. A key feature of this account is that the funds are maintained in foreign currencies like US dollars, pounds, euros, and yen, rather than in Indian rupees. As the funds are held in foreign currency, there is no risk of loss due to fluctuations in currency exchange rates. Upon maturity, the NRI receives the funds back in the same foreign currency. The interest earned on an FCNR account is completely tax-free in India and can be easily transferred abroad.
Recent RBI Announcement
Non-Resident Indians (NRIs) now have the option to consider depositing their dollar savings in India. In its June monetary policy review, the Reserve Bank of India (RBI) revealed that it would cover the entire cost of foreign currency hedging on new foreign currency non-resident deposits with a 3-5 year maturity, made until September 30, 2026. Additionally, on June 17, the central bank eliminated the cap on interest rates offered by banks on these deposits.
Consequently, major banks are now providing 6% interest on dollar deposits, with some smaller banks offering rates as high as 7.1%. For instance, Equitas SFB raised the interest rates on US dollar-denominated FCNR deposits for 3-5 years to 7.13% annually. This move offers a significant advantage compared to US Treasury yields of 4-4.2%, presenting a 2-3 percentage point dollar arbitrage opportunity without currency risk for investors and no tax obligations in India. This development is more aggressive than the RBI’s 2013 initiative, which limited hedging costs to 3.5% but still attracted $34 billion.
Banks are offering varying interest rates on FCNR deposits across 3- to 5-year tenures. Among the highest rates, Equitas Small Finance Bank and Ujjivan Small Finance Bank are offering a flat 7.13% across all three tenures, while AU Small Finance Bank is offering 7.1% for 3-4 years and 7% for 4-5 years and 5 years. Among large private lenders, Axis Bank, HDFC Bank, and ICICI Bank are offering a uniform 6% interest rate. Punjab National Bank offers slightly higher returns, ranging from 6.4% to 6.5%, whereas State Bank of India offers the lowest rates in this list, increasing from 5.25% for 3-4 years to 5.75% for 5 years. Overall, small finance banks are currently offering the most attractive FCNR deposit rates.
How Does this Program Function?
FCNR(B) is a fixed deposit that NRIs maintain in India in a foreign currency of their preference. It is offered in five currencies: US Dollar (USD), British Pound (GBP), Singapore Dollar (SGD), Canadian Dollar (CAD), and Australian Dollar (AUD). Unlike Non-Resident External (NRE) fixed deposits, which convert foreign currency into Indian rupees at the current exchange rate, FCNR(B) retains the money in the original currency throughout the term. At maturity, the principal amount and interest are returned in the same currency without any conversion risk.
This scheme is accessible to NRIs, Overseas Citizens of India (OCIs), and Persons of Indian Origin (PIOs). The program is open for new deposits with a duration of 3-5 years until September 30, 2026. These deposits are exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, making them appealing for banks to raise funds. The interest rates have witnessed a significant increase, as previous FCNR rates ranged around 3.5-4%.
NRE FD or FCNR?
In India, both NRE fixed deposits and FCNR (B) deposits are tax-free and fully repatriable. The real difference is the currency. NRE FDs are in rupees. This exposes you to the risk of currency depreciation, and based on past data, this hasn’t been profitable. Since 1991, the rupee has depreciated 4-4.5 percent against the dollar every year. An NRI who invested in an NRE FD offering 7 percent interest a year ago actually earned only 2-2.5 percent in dollar terms because the currency depreciated.
FCNR(B) completely eliminates this risk. Kalpesh Ashar, founder of Full Circle Financial Planners & Advisors, says in an ET report that for those looking to hedge their dollar holdings, FCNR is undoubtedly a better option than rupee FDs right now, as it fully covers the currency hedge.
However, advisors don’t recommend breaking existing NRE FDs. Premature withdrawals attract penalties, and switching would mean currency losses. According to Rakesh Patil, founder of Journie, a wealth management and corporate treasury platform, the best approach is to reinvest the new investment. He suggests investing in US certificates of deposit, treasury bills, or UAE fixed deposits. This is where comparisons arise and the importance of arbitrage becomes apparent.