Should NRIs invest in FCNR deposits with Forward Cover?

With FCNR rates regulated by RBI and volatile foreign currency market, a lot of banks have introduced and are marketing products for NRIs to generate more return on FCNR deposits. While there are catchy names used for the plans by various banks, like RupeeMax (HDFC Bank), Rupee Advantage Plan (Kotak), FCNB Premium Account (SBI), Smart Rupee Deposit Scheme (Union Bank), etc., the nature of investment is the same i.e. FCNR deposit with Forward Cover. It offers better returns than FCNR deposits, but whether NRIs should rush to invest in them?

Let’s analyze….

FCNR Deposit Accounts: NRI/PIO can open and invest in Foreign Currency Non-Resident (FCNR) Deposit Account in India. As the name suggests, only deposit account (No saving or current account) can be opened. The tenure of FCNR deposits are from 1 year to 5 years. As the minimum duration of FCNR FD is 1 year, no interest is payable for premature withdrawal before 1 year.

RBI has allowed FCNR deposits to be maintained in any freely convertible foreign exchange. Currently, SBI offers FCNR deposits in USD, EURO, GBP, CAN$, JPY, AUD, CHF, DKK, NZD and SEK. Most of all banks offer FCNR deposits in at least original 6 foreign currencies i.e. USD, EURO, GBP, CAN$, JPY and AUD.

The interest rates on FCNR deposits are regulated by RBI and are the same across all banks. Interest on FCNR deposits are also tax free in India and are fully repatriable.

The biggest advantage is that there is no currency risk i.e. you invest in USD, you receive USD on maturity. The disadvantage is that its interest is regulated and is lower; e.g. interest on FCNR deposit in USD for 1-2 years is 2.70% only.

Forward Cover:
To address the disadvantage of lower interest on FCNR deposits and looking at volatile Rupee, the banks came up with forward cover to increase the yield on the FCNR deposits.

NRI/PIO will enter into a forward contract with the bank wherein investor will exchange foreign currency at a predetermined exchange rate on future date. The amount of foreign currency and date of forward exchange will coincide with the FCNR deposit to give investor a better return.

The forward contract locks in the Rupee Return on the deposit and future movements in currency markets cannot affect returns. While the forward contract protects the depositor from unfavorable movements in the exchange rate, investor won’t be able to take advantage of any favorable movements. For that, he will need to break the forward contract at a fee/penalty.

Result:
Combining FCNR deposits with Forward cover could increase the return (yield) from 2.70% to 8-9%.

Looks promising, Right?…….. Not so much because of following 5 reasons.

5 Reasons why FCNR deposit with forward cover may not be advisable:

  1. By entering the forward contract, your investment is subject to the currency risk as the money will be credited in the NRE account in Indian Rupees. And, it defeats the very purpose and benefit of having deposit in Foreign Currency.
  2. Currently, the interest rates on NRE deposits are equal to or better than the total return of FCNR deposits with forward cover.
  3. If the foreign exchange rate turns favorable, you are still stuck with the forward rate. Otherwise, you have to pay fees or penalty to get out of the forward contract.
  4. NRE deposits can be made also for more than 5 years whereas FCNR deposits are for maximum of 5 years.
  5. Interest on NRE deposits is exempt from income tax in India. While interest on FCNR deposits are exempt from income tax in India, taxation of gain due to entering forward contract is debatable. That’s why, while comparing taxation between FCNR and Rupee Max (FCNR with forward contract), HDFC bank stated “tax exempt in entire deposit” and “-” respectively. Please check out my blog providing detailed analysis on taxation of such investment at “Are FCNR deposits with Forward Cover Completely Tax free for NRIs in India?

What to do?
This could be a great product for both investors and banks BEFORE December 16, 2011 when NRE interest rate was regulated giving return of 3.25%. However, it lost its value thereafter. Unfortunately, most of the banks introduced and/or marketing heavily such products only after December 16, 2011 (at a wrong time).

If you are ready to take the currency risk, please invest in NRE FD instead of FCNR deposits with forward cover. It will be easy, less paperwork, less worry (no monitoring of forex whether favorable or not), no complicated taxation and more rewarding (higher interest and no fees to get out of the contract).

However, if the return on FCNR deposits with forward cover is at least 1% higher than the return on NRE deposits, it may be explored by certain HNI investors. For others, it is simply not worth it as they still can get 9%+ return on NRE deposits (even after RBI reducing repo rate to 7.25% on May 3, 2013).

About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India)

Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.
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35 Responses to Should NRIs invest in FCNR deposits with Forward Cover?

  1. Shirish says:

    Hi Jigar,
    I have a question on FCNR account. If I become resident while the FCNR deposit account is still active, is the interest earned on FCNR deposit is taxable after I become resident? Or is the interest on FCNR account is tax free till its maturity irrespective of whether my residential status is NOR or RI?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Interest on FCNR deposits are exempt for non-residents and not-ordinary residents (NOR). Assuming you have been out of India for long 8-10 years, your status would be not-ordinary resident for 2-3 years and you would enjoy the tax exemption of FCNR deposits. Interest taxable for Ordinary residents. Thanks.

  2. Manoj says:

    As per IDBI website, “Proceeds received in Indian Rupees on maturity after application of Forward Foreign Exchange contract rate to be fully repatriable and tax free in India.”
    Doesn’t this mean that returns are completely tax free?

  3. Sid says:

    Dear Jigar,

    I work in Abu Dhabi and a representative from state bank of hyderabad contacted me and advised to invest in SBH Rupee Max Gain Deposit for NRI (FCNR Forward). He also advised that if I deposit amount for 5 years (without breaking the funds) I will get around 14% flat on my total investment and this will be givein in writing on the certificate deposit. Appreciate your thoughts.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I doubt about 14% taxfree return as FCNR FD rates have gone down. However, if you are okay with currency risk (that INR may depreciate) and the bank gives a written agreement/guarantee for the 14%, I suggest you may invest as it is about 5% more than interest on NRE FD. Thanks.

    • Ashish says:

      Hi Jigar,

      Can you plz share the details of the representative from SBH who offered this product to you as I am looking for soemthing similar for investment. Plz feel free to share the details on my personal mail id. I am currently in US. Many Thanks in advance. Best

      • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

        Usually, the products are regional i.e. for Middle East and may not be for US residents. Also, I do not know the SBH representative, if Sid or anyone do post the information, I will be happy to pass it along. Thanks.

        • Ashish says:

          Hi Jigar,

          Thanks for your reply

          Sid: Can you plz pass on the information of the representatives and I can try reaching out to him. I understand these products are offered by region but no harm in trying. Best

  4. Vinay says:

    Dear Mr. Patel,

    Good Day..

    I just need the best possible advice for 3 years in india. If I have to invest 30000$ .. what according to you would be the best return on the money if you were to invest.. what would you exactly do.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      My recommendation would depend on your Risk profile. I would invest my money (in order of increasing risk tolerance) in FCNR Bank FD (No risk), NRE Bank FD, MIP Mutual funds (<20% equity), Balanced mutual funds(upto 35% debt), Equity mutual funds, Direct Equity, and Real Estate Plot/Land (highest risk). Please call or email if you want to learn more or invest in India. Thanks.

  5. Tanmay says:

    Thank you for a good article. I invested in Rupee Advantage Plan of Kotak today and as per the calculations, I am getting 10.51% interest rate on my USD deposit. This is clearly more than NRE FDs for which I get 8- 9% Interest rate. I think I need not worry about the USD value after 5 years. If I keep the same amount in my foreign bank account for 5 yrs, I will not get anything more than 1% and in Indian bank, I will still get only 3-4% interest rate. If at all the USD rate crosses 100 mark in the next 5 yrs, I will benefit even if I do a premature withdrawal and pay the penalty. With Modi government, I dont think Rupee will collapse so much.

    Anyways, Thanks for your advice in the last paragraph of the article.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      You are very welcome. you got 2% spread over NRE FD. I appreciate that you liked our post and thanks for posting your comment.

    • Saroj says:

      The spread between the plain NRE Fixed deposits and the FCNR linked forwards is decided by the bank’s treasury. It depends on the commission/income that the bank want to gain on the deal.

      Now my bank is giving a clear spread of about 2 % on the FCNR linked forwards.

      The primary dis-advantage in the product apart from the taxability issue, is the liquidity part, which can be again addressed by extending a Over Draft on the underlying FCNR Deposit, but yes at a small cost.

  6. Park says:

    ICICI quoted me nearly 2% difference from the mid exchange rate each way. So the loss is 4%. This should be kept in mind. So if you get 9% interest on FD -4% -fluctuation. You might end up with 2/3%. Not worth the trouble these banks give you. SBI is the worst case. They don’t take any written complaint even if you go to the Indian Ombudsman. Is ICICI in India answerable to Ombudsman ? Currently SBI is being investigated by UK Ombudsman for too many complaints for delaying the repatriation of its UK client’s funds. Their NRI section even in UK don’t seem to have proper training and seem to have got the jobs through influence. The NRIhead seem to hate NRIs by addressing NRIs as ‘these people’ ………… It has been suggested by many that UK NRIhead should be sacked for rude remarks and attitude to SBI UK NRI customers who have complained to UK Ombudsman.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      You have to be very careful and understand all aspect of ANY investment product before you commit. You also have to keep in mind that banks are there to sell the investment products. It is YOU who needs to access whether it is good for YOU or not. A qualified experienced advisor is very helpful. Please invest only after consulting your advisor. Thanks.

  7. Anil says:

    Mr.Patel,
    I did not quite understand the first disadvantage you have quoted-
    “By entering the forward contract, your investment is subject to the currency risk as the money will be credited in the NRE account in Indian Rupees. And, it defeats the very purpose and benefit of having deposit in Foreign Currency.”

    If the currency risk still exists as you state, all banks would be basically lying about the product, wouldn’t they? The whole point of this type of deposit is so that the exchange rate is fixed. If the USD is converted at some rate, the assumption is on maturity, it will be converted back at the same rate.

    Perhaps I am not understanding this. Would you please clarify?

    Thanks.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Assuming your exchange rate is fixed, let’s say Rs. 80/USD; Now after 5 years, if 1 USD is 100 Rs., your FCNR deposit will be converted in INR at Rs. 80 only and not at 100. It is a forward contract and not an option contract where you have option whether to convert or not. If you want your money in USD after 5 years for any needs in your home country, you would convert the INR funds only at the spot rate (current exchange rate at that time) i.e. at 100 and may suffer loss – either in interest or in principal or both.

      Had you kept your funds in USD as FCNR deposit, while you would get comparatively lower interest, you would get foreign currency (USD) on maturity and would not suffer any principal loss. As your funds are converted into INR on maturity and you have no option to keep them in USD, your funds has a currency risk. You already made your money by investing in 5 yr FD in India at 5% compared to 1% in USA. Whether you want to increase your return by additional 5% with currency and other risks as mentioned in the blog, I leave decision on to you. I hope this is helpful. Thanks.

  8. CHELLAMANI says:

    dear mr. patel,

    thanks for the valuable article. I differ form you on a few points.

    1. the yield on CAGR basis is clearly about 1-1.3% p.a. higher than the NRE deposit rates assuming quarterly compounding which is a like-to-like correct comparison. I have just now booked with a CAGR p.a. rate of 11.4% with a Bank.

    2. Yes, the ex. rate is anybody’s guess, I agree, time down the line, but assuming that an individual is very clear that he will be a ‘rupee-man’ say 5-yrs. down the lien or ultimately make India his destination, why should he worry about the ex. fluctuation, AFTER he enters into this product ?

    To sum up, the perfect comparison of this product should be with the NRE deposits in Rupees and my observations are based primarily on that count.

    Re. taxation, I am told that if one continues to remain an NRI, there will be no tax on maturity. I am not sure of tax aspects if ne becomes a resident thereafter.

    Thanks

    Chellamani

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Dear Mr. Chellamani, Thanks for sharing your views. If 1-1.3% higher interest rate is enough for you to enter an agreemennt for FCNR and forward cover and take probable risk of depreciating rupee as well as taxation, you may please invest. However, I would request you to get a written opinion or response from the bank about the tax aspects. As mentioned in detail with income tax provisions in my blog “Are FCNR deposits with forward cover completely taxfree for NRIs in India” at http://nareshco.com/blog/?p=822, I still believe that it could be taxable to NRIs as well. For many 1% may not be enough to go into so much trouble. Thanks,

  9. Rajendra Bansal says:

    How safe are our deposits in FCNR FD accounts and how safe is the transaction during maturity? In USA, all banks are FDIC insured and hence, we do not have to worry about loosing our hard earned money. Lots of irregularities and change of policies do happen in India and hence, the trust in Indian Banking has lessened. I have NRI account in one of the Indian Bank that I do not operate time to time. Every time, when I have to make a transaction, Indian banks give me lots of headache such as asking the documents to be motorized, photos, copy of passport and make me go to bank back and forth numerous times. Anyone has any bad experience with FCNR FD upon maturity, Please share.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      FCNR FD are as secured as any other FD that you put in banks in India. In India, there is insurance however the insurance is of only Rs.100,000. However, as the banks are regulated by RBI and have to maintain certain reserves, I would say nationalized banks are more secured than private banks as in nationalized banks, Indian government is a majority shareholder. Among private banks, I would consider biggest 5 banks – ICICI, HDFC, Axis, Kotak and Yes some more secure than others. I would NOT suggest to invest in any of the Co-operative banks in India. The banking experience depends on which bank you work with and how good is your contact/relation/liaison with bank. I think the experience of NRIs with regular FCNR deposis would be good. However, Leveraged FCNR FD is a new product and experience would be known only after 3 years. Thanks

  10. Samir says:

    Thank you for the wonderful article. The banks are really mis-selling product like it is Manna for heaven for NRI.

  11. Arun Rao says:

    The article says that the interest rates on FCNR deposits are regulated by RBI and are the same across all banks. Is it true? When I checked, ICICI is offering 5.77% on a five year deposit while SBI offers only 4.77%. I am writing to you for confirmation because, if the rates are the same, I already have an account with SBI and do not want to go through the formalities and delays of opening another account with ICICI etc. It seems odd that SBI’s rate is lower, unless being a government bank, SBI does not have to care too much about India’s economic woes. Either that or we will have to expect this from SBI because they, being a governmental institution, are entitled to be lethargic when it comes to updating their website with things like current interest rates and such. I called SBI New York branch to get an answer and they asked me to (quote) “call India” – they don’t even offer a number. ( Local calls to ICICI for NRI deposits, on the other hand, get transferred to their call center in India with trained helpful staff).

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      RBI regulates and provides the maximum limit of the rate of interest on FCNR deposits for various maturities. However, banks are free to offer any rate that is lower than such rate. The limit was increased on August 14, 2013. While SBI’s website would be recent, I think they may not be proactive to increase the rates. However, they will eventually have to give higher rate to be in the competition. Kotak just increased rate few days ago.

      • Dhaval Shah says:

        I think the another difference between SBI and ICICI is SBI allows you to break premature for 3-5 years whereas ICICI does not. May be that is the reason ICICI can give 1% more only SBI is different all others are same.

      • aakash shah says:

        thank you for such a useful article.. so now kotak and other bank have increased their interest rate (from uk it is 5% ) is it worth investing money ?.. my agent told me that i would earn 13% interest if i invest for 5 years with kotak mahindra bank.. is my investment safe enough?

        • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

          Please do not go through the agent but visit the bank directly. Please reread this blog and also read and understand the tax aspect of the investment at http://nareshco.com/blog/?p=822 and if you think is a good investment for you, please invest. You may contact me and I will provide the contact of the right person at the bank. Thanks.

    • Gopinath says:

      I agree with you on the pain of handling SBI bank accounts. I’m in USA for a while and my Indian SBI account is virtually not operable. Multiple calls to customer care never yielded any good to me. But they are the safest and most trusted bank of India. I’ve a Savings Account with MOD facility which gives 8-9% of interest on my savings account. I guess no other bank in India offers such a high interest for Savings Account.

      But if I’ve to open an FCNR deposit, I may not go to SBI. Its pain to get things done with them. They want us to go to native branch for many day to day operations. It’s close to impossible!! I’ll take a bit of pain required to open account with ICICI/CITI/HDFC or any other private bank who offer better customer support.

    • Rupinder says:

      If you look at “Special FCNR(B)” instead of “FCNR(B)” account, then you can see the same rate as other banks. The difference being that the former is only available from 3-5 years and is only available for USD. Hope it helps!

  12. Somnath Naha says:

    Dear Mr. Patel,

    Now that the FCNR term deposit is offering higher rates of return (e.g. in USD for five years the rate of return is about 5.56%). Do you think it is advisable to go for FCNR than NRE in INR as the INR is devaluating very rapidly. I would appreciate your comments.

    Regards,
    Somnath.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Assuming you want your money back to USA in 5 years, if you think Rupee depreciation would be 4-5% or more per year (82-85+ in 5 yrs), have FD in FCNR. Else, invest in NRE. Your guess would be as good as anyone else’s. Good Luck…

  13. Zuzar says:

    this is what i recd from one of the hdfc staff please advice………

    **************
    Dear Sir,

    At HDFC Bank we constantly bring you the best investment ideas that are available in the market. One such interesting option is the arbitrage that is currently available between the NRE & FCNR deposit rates.

    For example, if you want to book a NRE Deposit for 5-year duration, your deposit would earn a yield of 10.83% p.a.(*) under compounding option. However if you were to book a RupeeMax Deposit for 5-year duration, the return on your deposit can be significantly better.

    The salient features of RupeeMax Deposit are:
    · No capital risk as money is invested as FCNR Fixed Deposit
    · No exchange rate risk involved as the exact maturity amount in Rupees is pre-fixed at the time of booking the Fixed Deposit
    · Maturity amount is fully repatriable outside India
    · Higher return as compared to NRE Fixed Deposit – earn 13.00% as against 10.83% for 5-year duration *
    · Available in other tenures – 12, 24, 36, 48 & 60 months (yields are different for each tenor)
    Tenure 36 Mo. 48 Mo. 60 Mo.
    Net Yield in INR 11.29% 12.00% 13.00%
    NRE Deposit rate (compounded ) 9.88% 10.34% 10.83%

    (*) Rate/return will change depending upon the prevailing rates.
    The above arbitrage opportunity is limited and may not be available at all times. So if you are planning to invest money this is the right time.
    In order to explain the above option to you in detail I would request you to kindly let me know a suitable time for the same.
    Assuring of the best at all times.

    Thanks and Regards,

  14. Murali says:

    Dear Mr J Patel,
    First of all, thanks for a nice and timely article on FCNR Forward contract (like HDFC Rupee max).
    Most of the points are very true. I am a NRI and recently entered in to one such contract (before reading your article) with HDFC in RupeeMax, I would like to clarify on certain points.
    HDFC assures, the entire proceeds (in INR) at the end of 5 years is TAX FREE. — Is that true or still not clear?
    At present, a NRE FD for 5 years is fetching an interest of 8.75% to 9% (maximum); whereas the return on Rupeemax is 9.5% per annum (while I booked the deposit recently in JPY); the yield is 12.03%. Is that return is (comparitively) OK?
    Please reply with your valuable inputs.
    Thanks and regards,
    Murali

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Please get a written opinion from the HDFC bank, which I think, they would not provide. Please check my 2nd blog wherein I have discussed the taxation aspect of the FCNR FD with forward cover at http://nareshco.com/blog/?p=822. Thanks.

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