Exchange Rate Risk in NRE Account (USD to INR)

What is an NRE account?

An account opened by a Non-Resident Indian (NRI) to the XYZ bank to deposit earned income in a foreign country. Most Indian banks provide enticing interest rates for NRE accounts, almost 6 - 8%.

But, the final return rate you will get is different because the exchange rate plays a role.

Example:

Let's say you deposit 1000 USD to NRE account at an exchange rate of 70 INR to the XYZ bank. The XYZ bank gives an interest rate of 7%.

Now you want to withdraw money after a year. Three cases are possible in terms of an exchange rate.

Let’s consider each case individually.

1. The current Exchange rate is ₹70, the same as you deposit your money

In this case, you earn simply 7% interest. So, your ₹70,000 is increased to now ₹74,900 after a year which is $1070.

2. The current Exchange rate is higher than ₹70; as an example, ₹75

In this case, your ₹70,000 is increased to ₹74,900 after earning 7% interest. But it’s not over. As the current exchange rate is ₹75, the final amount you receive back is $999. Even after waiting for a year, you didn’t earn anything.

3. The current Exchange rate is lower than ₹70, for example, ₹65

In this case, you earn 7% interest. So, your ₹70,000 is increased to now ₹74,900. Likewise, it's not over yet. As the current exchange rate is ₹65, the final amount you receive back is $1152. The interest was 7%, but the final total return was 15%.

Generally, most NRIs consider the only interest rate of the NRE account, but the fluctuation in an exchange rate can change the final return dramatically.

An NRE (Non-Resident External) account is a bank account for Non-Resident Indians (NRIs) that allows them to hold their foreign earnings in Indian rupees. When an NRI opens an NRE account, the account is denominated in Indian rupees. Still, the account holder can deposit foreign currency, such as the US dollar, which will be converted to Indian rupees at the prevailing exchange rate. However, the exchange rate is subject to fluctuations, which means an exchange rate risk is associated with NRE accounts. This risk arises because the value of the Indian rupee against the US dollar or any other foreign currency can go up or down, significantly impacting the value of the NRI's deposits in Indian rupees. Therefore, NRIs must be mindful of the USD to INR exchange rate when opening and managing their NRE accounts.