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 how to invest 25k in 2015 generate more return on FCNR deposits.
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. JPY, AUD, CHF, DKK, NZD and SEK. Most of all banks offer FCNR deposits in at least original 6 foreign currencies i. 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. USD, you receive USD on maturity. FCNR deposit in USD for 1-2 years is 2. 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. 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.