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The swiftness with which the Reserve Bank of India [R.B.I.] has been relaxing foreign exchange regulations, it seems that a day might not be far when full convertibility of the rupee would set in.
Moving a step closer towards liberalization of foreign exchange facilities, the Reserve Bank of India [R.B.I.] on Friday 1st of November 2002, allowed resident Indians to maintain foreign currency accounts with a licensed bank provided that the bank is an authorized dealer. Until now residents in India were permitted to retain only up to U.S. $ 2000 or its equivalent in cash and/or, travelers cheques, provided that the same has been acquired:-
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·While on visit to any place outside India by way of payment for services.
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From any person who is not resident in India or who is on a visit to India, in settlement of any lawful obligation.
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By way of honorarium or gift while on visit outside India.
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From an authorized person for travel abroad and represents unspent amount.
Any amount over $2000 in foreign currency had to be necessarily surrendered by converting the same into rupees. However according to the new regulations foreign exchange acquired from any of the four specified sources can be parked in the foreign currency account which will be known as Resident Foreign Currency (Domestic) Account and will have no ceilings on the balances that can be kept in these accounts.
According to the new regulations a resident foreign currency (domestic) account, has to be maintained in the form of a current account with cheque facility, which then means that no interest will be paid on the balances in these accounts.
The balances in such accounts may be utilized for any purpose tolerated by the current foreign exchange regulations for resident Indians like: - travel, medical treatment abroad, gifts (up to U.S. $5000), and purchase of books directly or through internet, education abroad etc.
In the current setting where foreign exchange is available for almost anything, one has to say that there seems to be hardly any advantage of having a resident foreign currency (domestic) account, for any resident who is not undertaking regular forex transactions.
However those who do undertake regular foreign currency transactions might benefit as it saves them not only the cost of converting rupees into forex and then back to rupees, (conversion cost) but also some very valuable time.
For reasons best known to the R.B.I. no interest will however be paid on the balances in these accounts, even at a time when the interest rates are at an all time low, and for this reason it might not make any sense to have a forex account when any currency can be converted into rupees, and invested with better returns in any interest bearing account. All it takes to buy forex from a bank is a legitimate purpose. Besides with the rupee currently showing strength against the dollar, the possibility of making exchange gains by holding foreign currency is a matter of pure gamble. However the new facility's progress shall be checked after a year and the scheme may be further modified or liberalized after the R.B.I. gets in a years feedback, and only time will tell if these accounts become interest bearing in a year or that the scheme is pulled back.
Regardless of what happens one may currently feel that the days ahead may have overseas investment by resident Indians and it may not take long before a resident Indian can have a shareholding in companies like Microsoft.
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Resident Foreign Currency (Domestic) Account
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The author can be reached at: rajat@legalserviceindia.com
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