NRE And FCNR Accounts: Which One You Should Choose

The Non-Resident Indians (NRIs) can invest in fixed deposits, both through the NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident). But they serve different purposes. And the choice is for NRIs to opt for either of them or both. In the June monetary policy committee (MPC) meeting, the Reserve Bank of India (RBI) eased the FCNR rules by announcing to bear the foreign exchange hedging cost and removing the ceiling on the FCNR(B) interest rate until September 30, 2026.

The hedging cost is the price banks pay to protect against the currently fluctuation.

When banks convert the foreign currency into the local currency to lend it to the borrowers, they need to manage the exchange rate risk.

Explains Preeti Zende, a Securities and Exchange Board of India-registered investment advisor (Sebi RIA) and founder of Apanadhan Financial Services: “Many NRIs prefer FCNR(B) deposits as they can deposit the same currency in which they earn. But banks need to deploy the funds in India in Indian rupees. In this process, the banks need to manage the risk of exchange rate changes. To hedge this exposure, they enter into instruments such as currency swaps or forward contracts. The cost of doing this is the hedging cost. When the hedging cost is higher, banks offer lower interest rates to depositors to cover the cost, and when this cost is lower bank can offer higher interest rates to attract more FCNR deposits from NRIs.

However, now this cost will be borne by the RBI until the last day of September this year.

While the RBI focused on attracting NRI deposits in FCNR(B), should NRIs invest in this or stay invested in their NRE deposits? Let’s check.

What Are NRE Deposits?

An NRE fixed deposit account can help individuals park their earnings in foreign currency in Indian currency. NRE FDs are rupee-denominated (opened in Indian currency), and the interest earned in it is also tax-free, contrary to the Non-resident ordinary (NRO) fixed deposits, where interest is liable for taxation.

What Are FCNR(B) Deposits?

NRIs can open FCNR (B) accounts (a fixed deposit)  with banks in permitted foreign currencies. Similar to NRE and NRO FDs, FCNR(B) is also open for NRIs, Overseas Citizens of India (OCIs), and Persons of Indian Origin (PIOs). The typical currencies in which the account is opened include the US dollar (USD), British pound (GBP), Japanese Yen (JPY), Australian dollar (AUD), Canadian dollar (CAD), and Singapore dollar (SGD).

When Should An NRI Choose An NRE Account?

Usually, NRE deposits offer the highest rates compared to FCNR(B). So, they look more attractive than FCNR(B) deposits. But higher interest rates should not be the only point to consider.

Zende says, “If you look only at the interest rate, NRE deposits may appear more attractive than FCNR(B) deposits. However, investors should look beyond the headline interest rate and consider the currency in which they will ultimately need the maturity proceeds. If the investor's future financial goals and expenses are in Indian rupees, an NRE deposit may be a suitable option.”

This means that if one wants to invest in Indian properties, mutual funds, stocks, fixed deposits, or so on, a NRE account will be suitable.

When Should An NRI Choose An FCNR Account?

As FCNR(B) is maintained in foreign currency only, this account invariably avoids currency exchange risk. So, if one expects depreciation in the rupee or a local currency, an FCNR(B) account is a better option to avoid depreciation risk by keeping the money in another currency.

Further, “If an investor ultimately needs the money in a foreign currency, an FCNR(B) deposit may make more sense. The maturity proceeds are received in the foreign currency, eliminating the need to convert them back into INR later. So it potentially avoids exchange-rate fluctuations and conversion costs,” says Zende.

Which One Is Better For NRIs?

Note that both the instruments are not taxable in India. So, when you have both the options, think of your future expenses and financial goals, and invest accordingly.

NRE FD is suitable when your plan involves investment in Indian instruments or assets. As NRE interest rates are typically higher than FCNR(B), it can compound better and generate higher value. On the other hand, choose FCNR(B) when your goals are foreign-specific, like children's education in foreign universities, etc.

As Zende puts it, “Since RBI is bearing the hedging cost for FCNR deposits until September 30, 2026, FCNR(B) looks very attractive. For those who earn in dollars right now, Indian banks are offering very attractive FCNR deposit rates. However, the right choice is not always the investment offering the highest interest rate. It is the one that best matches the currency of your future financial goals.”

In short, consider the two instruments created for different requirements. So, choose which one suits you.