FCNR(B) vs NRE Deposits: Understanding Currency Risk and Returns for NRIs

Foreign Currency Non-Resident (Bank)- FCNR (B)- and Non-Resident External (NRE) deposits are two key investment options for Non-resident Indians (NRIs), Overseas Citizens of India (OCIs) and Persons of Indian Origin (PIOs), looking to invest in India and earn interest. Both options come with tax benefits for investors, and the maturity amount can be fully repatriated. While they have several similarities, there are also some notable differences.

FCNR (B) allows investors to invest and withdraw in foreign currencies, including the US dollar, whereas NRE deposits and withdrawals are conducted in Indian rupee.

Investors in FCNR(B) deposits face no currency risk, while NRE depositors do carry this risk; if the value of rupee depreciates, it can affect their interest earnings. However, there are times when NRE depositors may end up with a higher maturity amount compared to FCNR(B) depositors, even if they invested the same amount and received the same interest rate.

Tanvi Kanchan, associate director, Anand Rathi Shares & Stock Brokers, illustrates through her two-step calculation how NRE depositors can potentially earn a higher amount on a 5-year FD of 7% interest rate compared to an FCNR(B) FD of the same duration and interest rate.

FCNR(B) vs NRE FD: What will be maturity on $50,000 deposit in 5-year FDs?

For calculation purposes, Kanchan took $50,000 investment for FCNR(B) and Rs 47 lakh ($1= Rs 94, $50,000= Rs 47 lakh) for NRE. At a 7% interest for 5 years, maturity amounts in both will be:

Parameter

FCNR(B) Deposit

NRE Fixed Deposit

Deposit Currency

USD (stays in USD throughout)

INR (converted at INR 94/USD)

Principal Invested

USD 50,000

INR 47,00,000

Interest Rate

7.00% p.a. (USD rate)

7.00% p.a. (INR rate)

Compounding

Half-yearly

Quarterly

Tenure

5 years

5 years

Maturity Value

USD 70,530

INR 66,49,457

Interest Earned

USD 20,530

INR 19,49,457

USD Value at Maturity

USD 70,530 (fixed)

Depends on USD/INR exchange rate at maturity

At this point, the winner between the two depositors will hinge on the rupee’s value at maturity.

If the rupee’s value against the US dollar remains unchanged for five years, which is highly unlikely, NRE depositors could end up with a bigger amount due to more frequent compounding compared to FCNR(B).

However, if the value of rupee depreciates, FCNR(B) depositors can earn more. On the flip side, if the rupee strengthens against the US dollar, NRE depositors could see a higher maturity value. Here’s how!

Scenario

INR/USD at Maturity

NRE FD – USD Value

FCNR(B) Deposit – USD Value

Rupee depreciates

INR 98.00

USD 67,852

USD 70,530

Rupee stays flat (no movement)

INR 94.00

USD 70,739

USD 70,530

Rupee appreciates

INR 90.00

USD 73,883

USD 70,530

The expert calculations show that if the Indian rupee strengthens against the US dollar, an NRE depositor can earn an extra $3,353 (or the rupee amount equivalent to that).

However, the possibility of such a scenario is much less as Kanchan says that over the past decade, the rupee has depreciated at a compounded rate of approximately 3% per year against the dollar.

Nevertheless, calculations show that an NRE depositor can still end up with a higher maturity amount compared to an FCNR (B) depositor, provided the rupee exchange rate remains constant.

Ankit Bagadia, director, business, BankBazaar, explains conditions when FCNR (B) and NRE can be a better choice.

When can an FCNR (B) deposits a better choice for NRIs, OCIs and PIOs?

FCNR(B) deposits are generally better suited for NRIs who want to retain exposure to a foreign currency and avoid currency conversion risk. Since both the principal and interest remain denominated in the chosen foreign currency throughout the tenure, the depositor is protected from rupee depreciation. FCNR(B) deposits can be particularly relevant for NRIs who expect to use the funds overseas in the future or prefer certainty around the value of their investment in foreign currency terms. They are also attractive during periods of heightened currency volatility when preserving foreign currency value becomes an important consideration.

When can an NRE deposits a better choice for NRIs, OCIs and PIOs?

An NRE FD may be more suitable for NRIs who have a positive outlook on the Indian economy and the rupee over the long term, or who expect to use the funds in India eventually. NRE FDs are denominated in rupees and typically offer higher nominal interest rates than FCNR(B) deposits.

However, the eventual return for an NRI also depends on currency movements. If the rupee remains stable or appreciates against the depositor's home currency, NRE FDs can potentially generate higher overall returns. They may also be preferred by NRIs who have regular financial commitments in India and are comfortable taking on some currency exposure.

Which account protects against rupee depreciation- FCNR(B) or NRE?

FCNR(B) deposits provide direct protection against rupee depreciation because both the principal and interest remain denominated in the chosen foreign currency. In contrast, NRE fixed deposits are denominated in rupees, which means the final return in foreign currency terms can be influenced by exchange rate movements.

If we talk about the current scenario, FCNR(B) are offering high interest rates to their depositors and appear to be more attractive compared to NRE deposits.

However, when interest rates of FCNR(B) deposits go down, they may lose their sheen and NRE deposits will have an edge.