With global interest rates continuing to remain low, non-resident Indians (NRIs) can use the non-resident (external) rupee account (NRE) as an attractive option to park their funds, say experts. According to them, the advantages of NRE accounts are many: They offer higher interest rates, have the repatriability option and are tax-free.
Compared with other bank accounts for NRIs in India such as foreign currency non-resident account (banks) or foreign currency non-resident (bank) [FCNR (B)] and non-resident ordinary accounts (NRO), NREs will continue to attract higher inflows, according to experts.
Globally, most central banks have decided to keep interest rates low with a view to kickstarting economic growth.
"People have been transferring funds from NRO to NRE accounts because NRE accounts are tax free and repatriable. In NRO account, interest income is taxed at source," said A Surendran, head of international banking, Federal Bank. The principal of NRO is non-repatriable, but current income such as interest earnings on NRO deposits are repatriable.
This was the case even with FCNR (B). "There were instances of conversions happening from FCNR (B) to NRE account due to higher interest rates offered in NRE deposits. People were willing to take currency risks, as the rupee had depreciated. So they converted it into a rupee deposits earning a higher interest rate," said N S Venkatesh, chief general manager and head of treasury, IDBI Bank.
In December 2011, the Reserve Bank of India (RBI) had deregulated interest rates on NRE and NRO to provide greater flexibility to banks in mobilising non-resident deposits. The deregulation resulted in banks offering rates to NRIs at par with domestic deposit rates, while interest rates on bank deposits offered by most developed countries continued to hover in the 0.2-3.2 per cent range. However, RBI had said the rates offered in NRE and NRO deposits could not be higher than domestic term deposit rates of similar maturities.
Similarly, in May, FCNR (B) deposit rates were made attractive by RBI. For a maturity period between a year and three years, the interest rates were revised to Swap plus 200 basis points (bps) from Swap plus 125 bps and for three-five years' maturity period, it was revised to Swap plus 300 bps, compared with Swap plus 125 bps earlier.
However, the deregulation did not help much on NRO schemes. RBI data showed for the period between April and October, banks attracted inflows worth $11,606 million in NRE, compared with an outflow of $1,323 million from NRO and $138 million from FCNR (B). The outflows in NRE during April-October 2011 were $1,626 million.
NRE will continue to be attractive and inflows will keep coming, according to Surendran. While inflows will keep decreasing in NRO and in FCNR (B), it will be more or less stable in the near term, depending upon the movement of the currency.
Interest rates are on the downward trend in India. Despite that, NRE will continue to attract flows, as it will still be better than the rates in other countries.
"Even if there is a cut of 25-50 bps in these rates, it will be higher than overseas rates, which are quite low," said Mohan Shenoi, president (group treasury and global markets), Kotak Mahindra Bank.