The Reserve Bank of India has taken fresh measures to suck out excess foreign capital, by allowing resident Indians to open accounts abroad and transfer up to USD 100,000 without seeking its approval under the Liberalised Remittance Scheme (LRS).

This measure follows the restriction imposed by the Central Government on the External Commercial Borrowings (ECBs) to check the rupee’s appreciation. Alongside, the RBI and the Centre have been encouraging overseas investments to flush out excess foreign capital.

Foreign exchange reserves touched USD 229 billion in the week ending August 3, 2007 Resident Indians can remit up to USD 100,000 to acquire assets like property and invest in mutual funds, venture funds, unrated debt securities and promissory notes without going through the RBI route. The Liberalised Remittance Scheme was introduced in 2004 to facilitate overseas investments by resident individuals.

Under the scheme, the RBI permitted upto USD 5000 as gifts and donations. The LRS permits resident Indians to purchase employee stock options of foreign companies if they are not linked to American Depository Receipts and Global Depository Receipts.

For non-resident Indians who have unpaid overseas loans at the time they return to India, the LRS scheme can be used up to the extent of USD 100,000 per financial year.

The scheme does not permit overseas remittance to the following categories:

• Margins and margin calls to overseas stock exchanges.
• Investments in the countries of Bhutan, Nepal, Mauritius and Pakistan
• Remittance to suspect individuals and organisations linked to terrorism
• Lottery, sweepstakes tickets, proscribed magazines and items prohibited under Schedule II of Foreign Exchange Management (Current Account Transactions) Rules, 2000.

A bouquet of banking and insurance schemes awaits non-resident Indians from Indian and foreign finance companies. This includes insurance schemes from ICICI Prudential and NRI banking products from Barclays of the UK. India’s leading insurance company, ICICI Prudential, is extending its service to NRIs in the UAE, with a representative office in Dubai.

Indian financial institutions are tapping the investment potential of the overseas Indian – a trend started by ICICI Bank and UTI Bank earlier this year following a license from the Dubai International Financial Centre. The banks have identified the high net worth NRIs with a personal income of USD 1 million in the Gulf.

ICICI Prudential will offer insurance products related to health, education and retirement. The representative office will restrict itself to promotional activities only in the UAE, and will not engage in any selling. On the other hand, Barclays is the first UK-based bank to launch schemes for the non-resident Indian population.

NRI savings and NRI term deposit accounts are being made available to the one million Indians in the UK through its 50 branches, which will expand to 70 more branches eventually.

The NRE and NRO accounts held in any of the branches of Barclays in the UK will be accompanied with a mandate facility for the account to be operated on from India by the account holder’s nominee. Interest offered on the accounts will be paid every half-year at a rate of 3.5%.

NRO and NRE Term deposits will earn interest upto 5.45%, and a premature closure of the account would not invite a penalty. FCNR accounts would be paid 5.57% on their foreign currency holdings in the bank.

The NRE and FCNR accounts are fully repatriable and not subject to tax in India, though NRO savings and term deposits are taxable in India.

Are you an NRI or about to become one?

And if so, have you been investing in Indian equities and mutual funds, and want to continue investing? Then this article is just for you.

Of course, NRIs and even those of you Indians who have taken up foreign citizenship, can invest in Indian markets. It is important though that you know the right procedures – let us tell you what to do.

Once you become an NRI, your stock market transactions come under PIS (Portfolio Investment Scheme), an RBI scheme. All transactions (buying/ selling of shares) must be done through this account, which is held with a designated bank branch. The bank obtains the PIS approval for you. 

You may have purchased shares before you became an NRI. For those investments, open a non-PIS account. You cannot use it to make any purchases; just sell shares acquired in IPOs as well as the secondary market, when you were an Indian resident.

Another must-have: A Permanent Account Number (PAN), for those investing in both equities and mutual funds.

As an NRI, you should also be aware that you do not need a PAN to file tax returns. Unless you have a taxable Indian income of over Rs 1.10 lakh, there is no legal obligation to file your tax return.

The Indian Diaspora has gone one-up on policy managers who have announced measures to discourage foreign currency deposits. After the Reserve Bank of India (RBI) put a cap on interest rates on non-resident (external) rupee accounts over three months ago, several Indians residing abroad have instead parked their money in local non-resident ordinary (NRO) deposits which fetch them higher earnings.

Data collated by RBI shows that banks are now seeing outflows from NRI deposits accounts. With the returns on domestic deposits being far more attractive, many such NRI deposits are being converted into local deposits.

According to the latest RBI figures, banks have registered net outflows of $656 million in the non-resident (external) rupee account (NR(E)RA) in April and May. Though many banks have subsequently revised their rates on NRI deposits of various tenures, they are yet to see any visible impact of these measures.

Bankers said given the cap on interest rates payable on NRE deposits, depositors do not benefit from the appreciating currency. However, rates on local NRO deposits end up being much higher. For instance, the interest rate on a one-year NRE deposit is close to 5.25%. But the rate on a domestic term deposit is at least 8%. Some banks have also floated special schemes of tenures of over a year to up to two years and the return on these schemes even higher.

RBI had further capped interest rates on NRI deposits in April this year to discourage capital flows which had been driving the Indian rupee to record a new high. Interest rates on fresh non-resident (external) rupee (NRE) term deposits with a maturity period of 1-3 years now cannot exceed the Libor/Swap rates, as on the last working day of the previous month. In January, the central bank had relaxed the cap up to 100 bps over the Libor of the last working day of the previous month.

Normally, an appreciating currency benefits an NRE depositor. This is because he has to bear the exchange rate risk. In a scenario marked by a rise in the rupee, he tends to take back more foreign exchange at the end of the tenure of the deposit out of the rupee proceeds. In an NRE deposit, the forex is initially converted into domestic currency and again reconverted back into foreign exchange at the time of repatriation on the maturity of deposits.

Sources said depositors often have to take a long-term view of the rupee. But the way the rupee has been moving in the past few months, they are not sure what course the rupee will chart.

Though income proceeds on NRO accounts are taxable, the interest rate differential is so wide that even after paying taxes, the net return is wider, pointed out the banker. In some cases, the NRI concerned may even choose to park the money in favour of their relatives and get the relative remit the money, as Indians, too, are now eligible to gift certain amounts to overseas relatives.

Such a move by the NRI would also help push up remittances inflows reflected in the form of invisibles of the balance of payments (BoP) data. NRI deposits are reflected in the capital account.

In case of high net worth individuals, their portfolio managers are advising their clients against parking their funds in the NRE deposits schemes. Even fixed deposits in their country of residence would earn them higher return, he said. As for the Reserve Bank which is grappling with huge forex inflows and a strong rupee, a slowdown in deposit inflows is a welcome sign as it would to an extent contain their liquidity management challenges.