After the recent deregulation of NRE rates – deposit rates for Non Resident Accounts – Karnataka Bank offers 9.75% for the “repatriable” (can take it back) NRE account deposits for a year.

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This is awesome, because NRE Account interest is not taxed in India. In the middle east, govt taxes are zero (or very low) so the return is great in the absence of Indian taxes (applicable for other deposits like NRO or for resident accounts).

NRE accounts are in rupees, so the conversion to dollars is at the exchange rate one year later. NRIs can buy a one-year forward rate on the currency which is currently at 55 or so. That is about 6% higher than today so the fully hedged rate, for an NRI, is about 3.75%. But hey, if you believe that the rupee won’t be much worse than today a year from now, the return is very attractive.

(These deposits were at 3-4% earlier. Deregulation has fuelled the rate increase.)

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