FCNR : Protecting funds from fluctuating exchange rate

 

What are FCNR Fixed Deposits?

FCNR Fixed Deposits are an excellent investment option for NRIs looking to retain their money in foreign currency and earn good returns on foreign currency earnings.

FCNR deposits stands for Foreign Currency Non-Repatriable account deposits. This is a  Term Fixed Deposit Foreign Currency account
and not a savings account. Deposits in this account can be made in any of the major currencies .

The following foreign currencies are permissible:-

• US Dollar
• British Pound
• Euro
• Japanese Yen
• Australian Dollar
• Canadian Dollar

As the NRI can maintain his account in the foreign currency, the risk for fluctuations in Currency Conversion is eliminated and the investor can earn a fixed rate of interest on his FCNR deposits which is usually more than the country in which the NRI is residing.

 

Why is FCNR  deposit needed ?

Mobility of Human Resource is the current trend in the corporate world. Many Indians who go abroad for employment opportunities are referred to as Non Resident Indians (NRI’s) or as Persons of Indian Origin (PIO’s) depending on their Residential Status.

Many such Indians residing abroad prefer to invest their surplus funds in India as the Interest earned in India is better than other western countries.

However, some investors fear that by Investing in India, they are exposed to Foreign Exchange Risk as they would have to convert their Investment in Indian Currency at the time of Investment and then again into Foreign Currency at the time of withdrawal. The Foreign Exchange Rates at the time of Investment and at the time of repatriation may differ thereby exposing them to Foreign Exchange Risk.

To ensure that NRI’s and PIO’s are not exposed to such Foreign Exchange Risk, the Indian Govt has allowed NRI’s to invest in India in Foreign Currency itself in FCNR Accounts, as compared to NRO/NRE Accounts wherein Investment can be made only in Indian Rupees

 

Who is an NRI?

An NRI is an Indian citizen who stays outside India:

•  for purposes of carrying out employment or any business or vocation;
•  under circumstances indicating an intention to stay outside India for an uncertain duration;
• any Indian citizen deputed outside India for a temporary period in connection with employment.

 

Who is a PIO?

A citizen of a foreign country (other than a citizen of Bangladesh or Pakistan) is a PIO if

• he/ she at any time held an Indian passport; OR
•  he/ she or either of his/ her parents or any of his/ her grandparents was a citizen of India; OR
•  spouse (not being a citizen of Bangladesh or Pakistan) of an Indian citizen or  above.

 

Features of FCNR Account

You can open an FCNR account for a minimum term of 1 year and maximum term of 5 years. The interest rates vary between terms and from currency to currency. Rates may also vary between banks. For instance, the rate for a 1 year FCNR deposit in US dollar would be in the range of 3-4% while the same for a deposit in Australian dollar would be 6-7%.

This interest is tax free in India. However, you may be subject to tax in the country of your residence for such interest.

Balances in FCNR can be freely repatriated outside India. You can also use the balance in FCNR account for making local payments in India.

Other features that can be noted down are as follows :

• Can be opened only by NRI’s or by Person of Indian Origin (PIO)
• Can be opened only in the Foreign Currencies specified above and thus the currency fluctuation risk is eliminated
• Regular interest is paid on the FCNR Account
• Deposits with a maturity of more than 1 year and less than 5 years can only be opened
• These accounts can be opened jointly with other NRI’s as well as with Resident Indians
• Nomination Facility is available and any NRI/PIO/Indian Resident can be made a nominee
• Conversion to another designated currency is permitted at a cost to the account holder.
• Recurring Deposits are not accepted under this scheme
• Loan Facility against FCNR Account can also be availed of. However, the Loans cannot be used for the purpose of re-lending, carrying on agricultural/plantation activities or for investment in Real Estate Business.

A major advantage of FCNR Account is that the Interest earned on these deposits is not taxable in India and nor is the principal deposited in these accounts taxable under the Wealth Tax.

Manner of Payment of Interest

1. The Interest on the FCNR Account is payable on the basis of 360 days to an year as per the guidelines laid out by RBI
2. The Interest on FCNR Account should be calculated and paid in the manner indicated below:-

• For deposits up to one year, at the applicable rate without any compounding effect
• In respect of deposits for more than 1 year, at intervals of 180 days each and thereafter for the remaining actual number of days. However, the depositor will have the option to receive the interest on maturity with the compounding effect

FCNR Account after change in Residential Status

• NRI deposits such as the FCNR can continue till the maturity date at the contracted rate of interest even after the account holder’s resident status changes to resident Indian.
• On maturity, these accounts are converted to either an RFC account or the Resident Rupee Deposit account.

 

FCNR swap deal: What it means for NRIs

Recently the Reserve Bank of India (RBI) announced several measures to stabilize the Indian rupee against the US dollar. Among them was a swap deal on FCNR deposits where the RBI has opened a window to the banks to swap fresh FCNR dollar funds, mobilised for a minimum term of three years at a fixed rate of 3.5% per annum for the tenor of the deposit.

 

What is the FCNR swap deal?
The swap deal was introduced as a means to encourage banks to attract more US dollars into India. The RBI has promised banks a forward rate at a premium of 3.5% per annum for all fresh 3-year FCNR deposits raised . So instead of hedging at the rate of 7% per annum, banks are getting this swap deal at 3.5% per annum. This acts as an incentive for banks to raise fresh FCNR funds as it lowers the cost of hedging.

This swap deal is open  only for deposits opened in US dollar for a period of over 3 years.

 

Will this benefit NRIs?

NRIs are likely to be swarmed with offers from banks to open FCNR deposits. For an NRI, the FCNR deposit itself can be an attractive proposition because the interest rates on US dollar deposits are in the range of 3-4% per annum as compared with rates as low as 1% in the US. Further, this interest is tax free in India and there is no currency risk.

The swap deal may not necessarily impact NRIs directly unless banks decide to share their gains and increase the interest rates on these deposits.

However, according to reports, what is happening is that foreign banks are rushing to lend funds to NRIs who can invest the money into FCNR deposits. For instance, an NRI would invest $100 of his own funds and borrow $400 from the US branch of his bank. The interest rate on the loan would be say 1%. The NRI would then open an FCNR account in the Indian branch of the bank and earn interest of 4%. At the end of year 1, he would make a total interest of 4% on his own funds of $100 and a net interest of 3% on the borrowed funds of $400. That makes a total interest of $16 or 16% of the original investment. For banks too, this is a win-win as their loan gets covered by the FCNR deposit and they get access to funds at a lower cost.

 

How is FCNR deposits contributing to Indian economy ?

Net inflows of NRI deposits amounted to $21.4 billion as compared to $2.7 billion. “A sharp increase in NRI deposits was on account of fresh FCNR(B) deposits mobilised under the swap scheme offered by the Reserve Bank during September-November 2013.”

It help in lowering current account deficit of India .

Contraction in the trade deficit, coupled with a rise in net invisible receipts, resulted in a reduction of the CAD to $31.1 billion (2.3 per cent of GDP) in April-December 2013 from $69.8 billion (5.2 per cent of GDP) in April-December of 2012