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Is a dollar account worth it?

George Smith Alexander

It's legal, at last. All Indian citizens can now legitimately start foreign currency accounts - as long as the source of the foreign exchange is a gift from a relative abroad, money that you earned for services rendered to someone abroad, or money that you saved from your last foreign vacation. There's no need to rush to your forex dealer to return your dollars.

Nor do you need to keep the cash at home (the limit till recently being $2,000 for cash holdings). This change follows the RBI's decision of November 1 allowing Indians to open resident foreign currency (domestic) accounts.

These accounts can be started with forex acquired by any individual in the form of currency notes, bank notes and travellers' cheques from sources specified by the RBI. Among the banks that have begun offering this facility are Standard Chartered Bank, HSBC, ICICI Bank, HDFC Bank, Bank of India and a few others.

Stanchart and HDFC Bank allow resident Indians to maintain accounts in US dollars, pound sterling and the euro - provided they have a minimum balance of $500, GBP 250 or euro 500.

There is an upper limit on the size of the deposits. ICICI Bank allows residents to maintain funds in these three currencies plus the Japanese yen. Customers can use funds from these accounts to make forex payments subject to the RBI's guidelines.

They will be issued foreign currency cheque-books and facilities to send money by demand drafts drawn on payees outside India. The account holder can also withdraw cash in Indian currency from the account and convert the funds back into rupees without any restrictions.

You can't use the money as you like, though. The permissible payments include foreign travel expenses, medical treatment abroad, gifts up to $5,000, education and purchase of books directly through the Internet.

"Earlier, individuals had to either keep the foreign currency with themselves or surrender it to the bank. They had no security as the forex had to be kept at home. Customers can now keep their dollars in bank accounts and benefit if there is any depreciation of the rupee," says HDFC Bank country head (marketing, retail lending and branch banking) Neeraj Swaroop.

The bank offers a 50 per cent reduction in charges on Travellers' Cheques and other forex instruments purchased from it. It also offers a preferential exchange rate if the customer wants to convert his forex holdings into rupees.

Adds HDFC Bank's vice-president, liability products, Shyamal Saxena: "Customers can convert the forex into rupees on the rate prevalent on the date of conversion. No commission will be charged by the bank for this conversion." Other banks too offer comparable benefits to account holders.

Should you, shouldn't you?

Just because you can open a dollar account doesn't mean you should. The pluses of opening a forex account are that:

• You don't have to pay commissions for dollars you may require in future;

• You gain if the rupee depreciates;

• The money can be kept safely with banks instead of under the pillow; and

• You can issue cheques and drafts, apart from making Internet payments for book purchases.

On the other hand, your money earns no interest, and if ever you convert your dollars into rupees, you can't reconvert. A rupee account earns four per cent in a savings account or more in fixed deposits. It makes most sense to open a dollar account if you are a frequent traveller abroad, and/or if you think the dollar will depreciate more than five-six per cent every year.

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