Interest on foreign source deposits (NRE and FCNR deposits) has always been regulated in India.
The interest on NRE deposits were highly regulated and fixed by RBI until December 16, 2011 and thereafter it was loosely regulated as interest rate was not allowed to be higher than the interest on comparable domestic rupee deposits (i.e. deposits by residents). Similarly, interest on FCNR deposits were not allowed to be more than 2.5% - 3.5% above the overnight respective currency swap rate for maturity of 1-3 years and for 3-5 years respectively.
All these changed on July 6, when RBI issued a master direction on interest rate removing the cap on the interest rate for incremental NRE and FCNR deposits until October 31, 2022.
RBI acted swiftly to stop further depreciation of rupee and keep the NRE FD attractive in comparison of increasing interest rates in the USA as it applies to incremental deposits only.
HDFC bank was the first to announce a special window of 2 days giving 6.8% interest to NRIs for 12-15 months deposit where the comparable domestic deposit rate was 6.25% i.e. extra 0.55% interest. And, in 2 days, HDFC raised deposits of $300 million about Rs. 2,400 crores.
With 2 more months to go (until Oct 31) and interest rates are expected to increase, the interest rate on special NRE and FCNR deposits may increase too.
As new NRI / FCNR deposits cannot be prematurely withdrawn, the right time to invest would be in October, after the announcement of increase in interest rate by US Federal Reserve (Sept 20-21) and RBI (Sept 28-30).
The bank may come up with FCNR FD with forward cover. Please evaluate the product carefully before investing.
Please contact us for any questions relating to NRE or FCNR deposits or investments, taxation or compliance in India.
