The Reserve Bank of India (RBI) recently introduced Foreign Currency Non-Resident Bank, or FCNR (B), and Non-Resident External (NRE) Account deposits for the period from July 7 to October 31. The move by the central bank is aimed at attracting the dollar into the country to arrest the fall of the rupee.
The rate hike on FCNR(B) deposits in the past one week has made them quite attractive as compared to term deposits in other countries. For example, the annual percentage yield (APY) of certificates of deposit (APY), or the US equivalent of fixed deposits in CD-India, is currently around 0.02%-1.01% for 3-year deposits in the top five banks by total assets. Is. Offers deposits maturing in 12 months at a rate of 0.02% -0.10%. In comparison, FCNR(B) deposits with maturity of 12 months and maturity of 36 months, closed till November 4, will fetch 2.5-4% and 2.88-3.8%, respectively.
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What is FCNR and NRE?
FCNR(B) is a fixed deposit that allows NRIs and Persons of Indian Origin (PIOs) to park their foreign earnings in Indian banks in the currency of their country of residence and earn interest thereon. BankBazaar.com CEO Adil Shetty said, “As the principal and interest are transferred in the currency in which the account is maintained, there is no loss of exchange and the accounts are protected from foreign exchange rate risks.”
FCNR(B) deposits can be made in currencies like US Dollar, British Pound Sterling (GBP), Euro, Yen, Australian Dollar (AUD), Singapore Dollar (SGD) and Canadian Dollar. In NRE deposits, currency deposited from abroad is converted into rupees.
Manoj Trivedi, Co-Founder, Jama Wealth, a SEBI registered investment advisor, said, “NRE deposits are similar to an investor who converts foreign currency, specifically dollars, into Rupees (INR) and then fixed deposits into Indian currency. does.” ,
Indian residents can also open and maintain these deposits with an NRI relative as joint holders, but since the money has to come from outside India, Indian joint account holders cannot make deposits. Money is repatriable from both types of deposits
What is change?
The reference rate for FCNR(B) deposits is the Overnight Alternative Reference Rate (ARR), which is published once every month by Financial Benchmarks India (FIBL). As per RBI guidelines, banks can offer up to 250 basis points (one basis point 0.01%) and 350 basis points for deposits with maturities of one year to less than one year and up to three years and five years respectively . and above ARR. For NRE deposits, the interest rates cannot be higher than the rates offered by banks on comparable domestic rupee fixed deposits.
RBI has removed these guidelines till 31 October. “This will be applicable only on incremental deposits booked during the sanctioned period,” said Shyam Mani, head of SME and NRI banking, CSB Bank.
“Banks are not required to maintain CRR and SLR on incremental FCNR(B) and NRE deposits during this period. Surinder Chawla, Head-Branch & Business Banking, RBL Bank said, it is proposed to pass on the benefits to the customers through better interest rates.
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 increased the interest rate on NRE fixed deposits by 10 bps across all tenors, with the revised interest rates in the range of 5.50-5.70%.
Should you invest?
The locked rates on fresh deposits will be for the entire tenure during a period of four months. Also, the interest earned from these deposits is exempt from tax in India. Note that these deposits also attract a penalty of 0.25-1.0% on premature withdrawal and no interest is paid for withdrawals before one year.
Trivedi said investors should calculate the return on NRE deposits by taking into account the conversion loss and exchange rate changes. “Suppose, the current USD/INR exchange rate is 80. An NRI converts $10,000 to INR 80, that works 8 lakhs. Assuming that NRE deposits earn interest at the rate of 5%, this amount increases 8.4 lakhs. Meanwhile, in one year, let’s say, the rupee has become 82. at the depreciation rate, 8.4 million now equals $10,244 instead of $10,500 80 conversion rate. In other words, the NRI investor earns a return of 2.44% in dollar terms. It is beneficial to the depositor, if during the period when the NRE deposit was made, the interest rate on the 1-year USD deposit rate is less than 2.44%.”
Shetty said depositors should choose a strong scheduled commercial bank to park their funds. “Deposit Insurance covers only accounts up to a maximum of 5 million, which comes out to about $6,300 or closer to £5,300, which is less.”
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