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.
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.