Foreign Currency account for residents in India made its debut as a facility for non-resident Indians who had returned home for good. At that time, they were entitled to buy from a bank, over a period of ten years, half the foreign exchange they brought back with them to India when they came back on permanent return. Later, this facility, called the Returning Indians Foreign Exchange Entitlement Scheme (RIFEES) underwent a few changes and morphed into the Resident Foreign Currency Account (RFC). Instead of being entitled to buy the foreign exchange they had brought back with them, returnees were allowed to hold it in a foreign currency account in India. Money in the bank obviously was a source of greater comfort than a document conferring the entitlement to buy forex!

A resident can have an RFC account in his name, with an authorised dealer in India, provided it is funded out of foreign exchange repatriated from abroad by conversion of foreign assets earned when he was a non- resident. Pension and other payments received from the overseas employer as well as proceeds of gifts or overseas assets received or inherited from a non-resident can also be held in this account. The funds in RFC accounts can be used for any purpose, including investment abroad.

The next significant development was a facility for those who earn foreign exchange for the country, appropriately called the Exchange Earner's Foreign Currency Account (EEFC) Scheme. Those who earn foreign exchange are allowed to keep a part, ranging from 50 to 100 per cent, in foreign currency in these accounts. Capital receipts and remittances received due to any undertaking given to the Reserve Bank are not considered eligible for credit to EEFC accounts.

EEFC account holders can freely remit the funds in these accounts to make current payments to people and companies abroad. Residents can pay other residents for goods or services in foreign exchange from EEFC accounts. Exporters can lend forex up to $3 million, from EEFC funds to importer customers and credit repayments to the accounts. EEFC money can be used to prepay external commercial borrowing and for investments abroad subject to some conditions.

New scheme
The latest arrival on the scene is the Resident Foreign Currency (Domestic) Account, which can be held by residents as current accounts in foreign currencies. This initially caused some excitement in some circles as people envisaged themselves opening and funding these accounts with foreign currencies bought in the market as part of a hedging or investment strategy. A quick reading of the circular sent their hopes crashing as it was clear that only foreign exchange notes and travellers cheques received as honorarium or gift or for services rendered to non-residents and legally acquired for travel abroad and brought back unspent can be kept in this account.

Funds in the RFC (Domestic) Account can be used to pay for any transaction that is permitted under existing foreign exchange regulations. Like in the case of EEFC accounts, one can draw cheques on these accounts but the bank cannot pay interest on balances. For some time now, forex that is eligible to be credited to these accounts could, be retained with residents as notes and travellers cheques up to a limit of $2000; the present facility is in addition to the earlier one. Though there are no ceilings on the balances that can be kept in these accounts, considering the limited sources of credit, these may not be too large.

Little advantage
This step toward further liberalisation may not have a significant impact on everyday life. At a time when one needed a permit from the Reserve Bank of India for the smallest of foreign exchange needs, the entitlement for holiday travel was $100 once in three years and getting caught with a few dollar notes in your pocket could mean a grilling from the Enforcement Directorate, a foreign currency account would have been a wonderful thing. Now, in an environment where foreign exchange for most needs is easily available, there seems to be little advantage in keeping foreign currency RFCD accounts, except some small saving on exchange conversion costs.

For one thing, it does not make sense to keep funds in non-interest bearing foreign currency accounts when they can be converted into rupees and gainfully deployed. As and when one needs forex for any legitimate purpose one can just buy it from the bank. Secondly, the rupee has recently been showing a strength that seems to have considerably reduced the possibility of making exchange gains by holding foreign currencies. However, a few people may find the facility useful. For example, someone who finds that $10,000 per person is not enough for a planned holiday can economise on one year's holiday, bank the unspent amount and use it for the next year's vacation.

While welcoming a regulatory relaxation, one wonders why the Reserve Bank frowns on banks paying interest on funds in these and EEFC accounts. The prevailing comparatively low rates of interest and the need for the domestic currency for day-to-day needs will ensure that balances in these accounts are never too large. The interest on these balances, if allowed to be paid, will also be correspondingly low. May be we will soon see a day when foreign currency accounts can be credited with funds from more sources than those now allowed.