Non Resident Indian (NRIs) who would like to open an account in India have several options to choose from such as NRE Fixed Deposit Account, Non-Resident Ordinary (NRO) Savings Account and Foreign Currency Non Resident (FCNR) Fixed Deposit Account among others.
There are several factors which NRIs should consider before choosing to open an account in India such as the following:
Can a relative or family member of the NRI in India operate the account with a mandate card provided by the bank?
Should the funds in the account be deposited from sources in abroad only or from India as well?
What are the currencies in which the account can be opened and the associated risk of currency rates?
Will the principal and the interest in the account come under the purview of tax laws in the country.
Can the funds be converted back to the foreign currency?
According to experts, FCNR play a significant role in terms of attracting remittances from NRIs. It is, in some ways, a unique financial instrument in that unlike NRE and NRO accounts, FCNR accounts can be opened as term deposit accounts only. FCNR accounts can be opened from overseas by submitting copies of passport and visa of the account proposer in addition to bank accounts held overseas, proof of foreign residence and income documents among others.
Interest rates offered for FCNR accounts may vary depending upon the type of currency and the bank. For instance, FCNR deposit (one year) in USD may be around 2.5 to 3% but could be pegged at 5% for the Australian dollar.
Some of the advantages of the Foreign Currency Non Resident (FCNR) Fixed Deposit Account are as follows:
RBI, in a bid to attract more foreign exchange into the country, may announce a ‘bonanza’, as it were, for NRIs by offering high interest rates on FCNR deposits. According to experts, increased inward remittances from NRIs, lead to more forex reserves, which in turn, reduce the current account deficit (CAD) of the country. The current account deficit is one of the main reasons of depreciation of the rupee. According to experts, any tapering of quantitative easing (QE) by the US Federal Reserve Bank, raises fears of less capital investment in India by foreign institutional investors (FIIs).
While raising interest rates under the FCNR deposit scheme may prove beneficial for NRIs, RBI have certain protective measures for banks in India such as facility of swapping the US dollar funds at a fixed rate (usually 3.50%). The swap facility and the high interest rates offered on FCNR deposits can cease with prior notice since they reportedly expose the RBI to incur losses running to thousands of crores. The RBI, therefore, may discontinue the said facility and reduce interest rates if it attracts the desired forex reserves into the country.
Some of the disadvantages of the Foreign Currency Non Resident (FCNR) Fixed Deposit Account are as follows:
With close to $25- $27 billion in FCNR deposits set to mature by November 2016, market analysts are anticipating a volatile Rupee by the end of the year. The Foreign Currency Non-Resident (FCNR) deposits, which are a type of fixed deposit offered to non-Resident Indians, account for around 1% of all deposits in India.
The outflow of such a large amount of cash would negatively affect the performance of the Rupee, especially if exports continue to decline.
Exports have seen a decline since December 2014, with exports in April 2016 $20 billion lower compared to the previous year.
When the FCNR deposits expire, it would lead to Dollar outflow from the country, which might require the RBI to intervene to keep markets stable.
Measures the RBI could take at such a time include accumulating Dollar reserves up till November, and allow the Dollar reserves to dip during this period by flooding the market with the currency. Another option could be issuing Sovereign Dollar bonds through government entities or a lowering of the CRR ratio during the deposit maturity period.
20th june 2016