Bank Smart: Hold your forex, don’t convert it

Do you make frequent visits abroad and knock at the doors of the forex dealer to convert your rupees to foreign currency? You can save on the commissions that you pay your forex dealer every time. Banks in India provide a resident foreign currency domestic (RFCD) account for individuals residing in India. This is different from the resident foreign currency account for returning non-resident Indians, which was detailed in these columns last month.

An RFCD account can be opened by any individual in the form of a current account with a bank. You can hold this account in any of the major currencies such as the euro, british pound and the US dollar. ICICI Bank provides an RFCD account in Japanese yen as well. However, the account should be maintained in only one currency of your choice. If you want a different currency, then a separate RFCD account has to be opened for every currency.

Most banks also specify a minimum balance criteria. In Axis Bank, for instance, a minimum of $100 or £60 or €100 or 20,000 yen has to be retained as a minimum average quarterly balance in this account. Else you will be levied a penalty of $5 or £3 pound or €5 or 1,000 yen per quarter as per the currency in which you hold your RFCD account. However, as there is no upper ceiling, you may hold as much foreign currency as you want in this account.

You cannot just park foreign currency. The source of the money that you intend to park in the RFCD account will have to meet the following criteria. The accounts allow deposits of foreign money earned from rendering any professional service (not business income) outside the country; gifts received from a relative staying abroad or from a NRI and unspent amount from your pervious travel outside the country.

The documentation process will involve the normal Know Your Customer (KYC) rules of submitting your identity and address proofs. You have to declare the forex source; some banks may ask for your passport copy as well.

Unlike other account, transactions in the RFCD account cannot be performed anywhere. It is allowed only at the branch where you hold your account. There may also be restrictions on withdrawal. Axis Bank, for instance, does not allow cash withdrawal in foreign currency. You either have to take a demand draft or do a telegraphic transfer in foreign currency. ICICI Bank allows you to withdraw either in foreign currency or the rupee equivalent of foreign currency as well. But in the case of HDFC Bank, direct withdrawals are again not allowed from the RFCD account. You will have to transfer the money to a normal rupee savings or current account and take it from there. So having a current or savings account with HDFC Bank is mandatory if you have a RFCD account there.

If you are a frequent traveller, this account ensures that you don’t lose heavily from rupee depreciation and are thus hedged against exchange risk. It also helps you save on commission that you pay the forex dealer every time. This account can be used as a hedge for those who plan a vacation abroad at least once a year.

Analysing one-year rolling returns on the rupee-dollar exchange rate for the last five years shows that 80 per cent of the time, the currency has depreciated. The depreciation has been more than 5 per cent about 60 per cent of the time. So though you do not actually earn an interest through your RFCD current account, the currency depreciation can result in a return that is more than what a savings account will fetch.

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