Foreign Currency Investment In India: A Guide

Investing in foreign currency in India is a complex process that requires knowledge of the country's foreign exchange rules and regulations. The Liberalised Remittance Scheme (LRS) governs the rules for foreign exchange transactions, allowing residents to remit foreign exchange for current or capital account transactions. One key consideration is the limit on the amount of foreign currency that can be spent or invested, which is currently set at USD 2.5 lakh per individual per financial year. To initiate currency trading in India, individuals must open a forex trading account with a broker and abide by Customer KYC norms. The Indian currency market offers cash-settled currency futures trading on platforms such as NSE, BSE, and MCX, where trading occurs between 9:00 am and 5:00 pm. It's important to understand the risks involved, such as exchange rate risk, transaction risk, and political risk, and choose a reputable broker registered with the exchange.

Open an FCNR or Foreign Currency Non-Resident Deposit Account

To invest foreign currency in India, you can open an FCNR (Foreign Currency Non-Resident) account, also known as an FCNR (B) account. This is a type of fixed-term deposit account that can be opened in several freely convertible foreign currencies, including USD, GBP, EUR, CAD, JPY, and AUD. The minimum deposit amount is typically 1000 units of the chosen currency, and the account can be held for a period between one and five years.

FCNR accounts can be opened by Indian citizens who are non-residents under FEMA (Foreign Exchange Management Act), as well as non-Indian citizens and Persons of Indian Origin (PIOs) who are also classified as NRIs under FEMA. The account can be opened individually or jointly with other NRIs/PIOs/OCIs (Overseas Citizen of India), including close resident relatives on a "former or survivor" basis.

To open an FCNR account, you can transfer funds from an existing NRE/FCNR or NRO account, remit funds from overseas, or deposit foreign currency or traveller's cheques while visiting India. The interest earned on FCNR deposits is typically exempt from Indian income tax, but it may be taxable in your country of residence. The principal amount and interest earned are fully repatriable, meaning you can freely transfer funds overseas without restrictions.

When choosing a bank to open an FCNR account, you may want to consider the interest rates offered, the minimum deposit requirements, the availability of loans against the deposit, and the ease of transferring funds to overseas accounts.

Open an NRE Account

To open an NRE account, you must be an NRI (Non-Resident Indian) with earnings from outside India. NRE accounts allow NRIs to save or invest their foreign earnings in Indian rupees (INR). The key benefits of an NRE account are:

• Full repatriability: Funds can be freely transferred back to a foreign country without restrictions.
• Multiple account holding: There are no limits on the number of NRE accounts an NRI can hold, allowing them to earn higher interest rates and ensure sufficient funds to meet domestic expenses.
• Convenient maintenance: NRIs can appoint an Indian resident as a power of attorney holder to operate the account and facilitate withdrawals within India.
• Investment: NRE accounts enable capital market transactions, such as buying and selling shares, by transferring funds to and from the account.
• Tax benefits: NRE accounts offer tax exemptions on both the principal and interest components of investments.

To open an NRE account, you will need to provide the following documents:

• A filled-in application form
• A copy of your passport
• Residence permit or visa for the country where you are residing
• Salary slips from your employer
• 2-3 recent passport-sized photographs
• Money remittance-related documents

It is important to note that NRE accounts cannot be used to deposit money earned by an NRI within India. For income earned in India, NRIs need to open an NRO (Non-Resident Ordinary) account. Additionally, NRE accounts hold funds in INR, whereas FCNR (Foreign Currency Non-Resident) accounts maintain deposits in the foreign currency of your choice.

Currency trading

In India, currency futures can be traded on popular exchanges like the NSE, BSE, and MCX. Currency trading usually happens from 9.00 am to 5.00 pm. To start trading, you need to open a forex trading account with a broker. You may not need to open a demat account.

To make your first forex trade, you must first open a currency trading account and fulfil the broker's KYC requirements. You will then need to deposit a margin amount, which is the deposit amount that the broker holds while your forex trade remains open. You can start trading once your broker shares the access credentials to your trading account.

It is important to note that currency trading is considered a high-risk playground. An adverse change in the exchange rate can lead to huge losses if not chosen and monitored timely and regularly. Other risks include credit risk, leverage risk, fluctuation in the forward spread, mismatch in the forward contract amount, and maturity gap in the transaction.

When choosing a broker, ensure that they are registered with the exchange and are of good repute. The leverage and margin options offered by the broker are also important. The charges of the broker should be considered, as well as the initial deposit required and the convenience of the deposit and withdrawal processes.

Foreign bond funds

When investing in foreign bond funds, it is important to understand the risks involved, such as currency risk, sovereign risk, and political instability. Currency risk refers to the impact of fluctuations in exchange rates between the foreign currency and the investor's home currency on the value of bond returns. Sovereign risk, also known as credit risk, is the possibility that the issuing foreign government may default on its debt obligations. Political instability in the issuing country can also impact the economy and lead to higher volatility in bond prices, as government policies and decisions can significantly influence bond prices and yields.

In addition to these risks, there are regulatory and tax considerations when investing in foreign bond funds. The regulatory framework and tax policies of the issuing country may differ significantly from those of the investor's home country, affecting how the bonds are traded, reported, and taxed. Investors may also face higher transaction costs due to currency conversion fees, foreign brokerage fees, and other cross-border expenses associated with investing in foreign bond funds.

Despite these challenges, foreign bond funds can provide investors with access to economies with different interest rate environments and political conditions, making them a viable option for those seeking global portfolio diversification and exposure to foreign investments.

Multinational corporations

When investing in India, multinational corporations should consider the following:

• India has a deep-rooted and highly effective democratic regime, ensuring a calm and stable political environment.
• The country boasts a well-developed administration and an independent judicial system, along with a vast geography, making it a repository of resources.
• India's workforce is educated, hard-working, and skilled, with a strong presence of engineers, management staff, accountants, and lawyers.
• The country hosts an ever-growing consumer base, making it one of the world's largest markets for manufactured goods and services.
• India's proximity to key manufacturing sites and suppliers, along with low development costs, makes it an attractive base for multinational companies to export to other high-growth emerging markets.

However, there are also some disadvantages and challenges that multinational corporations should be aware of:

• Lack of adequate infrastructure can slow down the country's development.
• Cumbersome and slow administrative procedures at the federal level can hinder economic reforms.
• Labour regulations remain rigid and among the most complex in the world.
• High corporate debt and non-performing assets are issues to be mindful of.
• India is a net importer of energy resources, and its public finances are weak.

In recent years, the Indian government has implemented significant structural economic reforms to enhance the business environment and attract foreign investment. These reforms include liberalising restrictions on foreign investment, updating bankruptcy and labour laws, abolishing retroactive taxation, and replacing state border taxes with a national Goods and Services Tax.

Additionally, the Reserve Bank of India (RBI) has released guidelines under the Liberalized Revenue Scheme (LRS) that allow Indian residents to invest up to $250,000 per financial year for overseas investments, including foreign stocks and mutual funds.

Frequently asked questions