India is likely to go ahead with a plan to issue
rupee-denominated bonds overseas
for the first time, in an effort to bring in capital and arrest the rapid fall
of its currency against the dollar, a senior government official told The Wall
Street Journal last week.
Details about the bond are patchy and it’s unclear when they might
be issued. But according to the official, the bonds under consideration will
protect overseas investors from currency fluctuations, an attractive
proposition given that the rupee has fallen around 22% against the U.S. dollar
since May and reached another new low Wednesday of 68.75 rupees against the
greenback.
The proposed bonds would be targeted at investors who have an
interest in India, such as Indians living abroad and companies which need
rupees at a future date to expand their operations in the country, according to
the government official.
So what should nonresident Indians know when considering buying
the proposed bonds?
Financial planners say they’ll need to check the interest offered
on these bonds, and details of how the Indian government plans the interest
earned on them. The success for these bonds will depend on how they “compare to
alternatives already available for nonresidents to invest in India,” said
Vishal Dhawan, a financial planner at Mumbai-based Plan Ahead Wealth.
With interest rates in the U.S. at below 1%, many investors may
want to lock into India’s higher interest rates. But they already have some
routes available to do so, in the form of bank deposits offered by Indian banks
to non-resident Indians.
Earlier this month, India allowed banks to offer higher interest
rates to nonresidents than they were paying earlier, in a bid to encourage
foreign capital into the country.
Some banks like Mumbai’s Axis Bank, have already raised interest
rates on such deposits.
Here’s a look at the three main types of deposits currently
available to nonresident Indians:
Foreign currency denominated
nonresident fixed deposits, allow an individual to invest in a foreign currency, say U.S.
dollars or British pounds, and get their money back in the same currency.
This investment works best for people who want to earn a higher
interest rate than their local bank, say in the U.S. or U.K., but don’t want to
take any currency risk.
Interest on these accounts varies depending on the bank and the
currency of investment.
ICICI Bank pays around 3.6% interest annually for a five-year bank deposit held in U.S. dollars, whereas HDFC Bank
pays 4.56% for a similar
duration. Foreign banks pay lower interest on similar deposits.
U.K.’s Standard Chartered Bank pays an interest rate
of around 0.8% for a U.S.
dollar-denominated bank deposit of three years. It doesn’t offer a five-year
deposit.
Nonresident External accounts
(NRE): These bank
accounts are maintained in rupees, and thus carry currency risk.
If the rupee depreciates further during the tenure of the bank
deposit, the investor could end up getting lower amount of dollars or pounds at
the time of repatriating funds.
But these deposits carry hefty interest.
An NRE savings account, for instance, pays a 4% interest rate. A five-year NRE
fixed deposit would pay 8.75% per year at banks like
ICICI Bank of HDFC Bank.
The interest earned on these deposits is not taxed in India, but
would likely be taxed in the country of the investor’s residence.
These deposits make sense for those who feel that the Indian
currency is likely to be stronger after a period of time for which they’ve made
the investment. The principal and interest earned on these accounts is fully
repatriable.
Finally, nonresident Indians or people of Indian origin can also
access the nonresident
ordinary or NRO account or deposit.
This deposit can be used to invest income earned by nonresidents within India, such as
rental income from an Indian property. Funds in this account are held in
rupees, and the interest rates are similar to those paid on NRE accounts.
But unlike the NRI Banking,
banks would deduct a portion of the taxes on any gains made on this account,
though this tax can be offset against tax payable in the U.S. or other
countries.
Also, deposit-holders can withdraw only $1 million a year from
these accounts. This account is the option for nonresidents who earn money in
India that must be deposited in an Indian account before it can be taken out of
the country. Nonresidents are not allowed to hold normal current accounts in
India.
