Businesses involved in international trade are necessarily exposed to currency risk and various uncertain forex charges. Foreign currency accounts are a simple solution to such problems. It is an account that transacts in foreign currencies, eliminating most of the FX risk.

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Any resident of India can open such an account. There are many options available, like a savings, current, or term deposit account. Each has its own advantages and disadvantages. In this article, we try to give you a better understanding of the various foreign currency accounts you can open in India, and what you can get out of them.

What is a Foreign Currency Account?

FCA accounts are commonly used by businesses involved in international trade. These accounts can hold and transact in foreign currencies. They eliminate the need to convert currencies to INR unless required. While engaging in foreign trade can be complicated, FCA accounts greatly simplify the process. 

Types of Foreign Currency Accounts in India

1. Exchange Earner’s Foreign Currency (EEFC) Account:

This is a non-interest-bearing account that exporters use to handle their foreign currency earnings. It lets businesses keep their foreign currency without immediately converting it to Indian Rupees, making it easier to manage and utilize funds from international sales.

2. Resident Foreign Currency (RFC) Account:

 Designed for residents who have international currency from sources like pensions or insurance claims, this account allows them to hold and use foreign funds within India. It's versatile, available as a current, savings, or term deposit account, and gives you the freedom to handle your foreign currency without restrictions.

3. Resident Foreign Currency (Domestic) RFC(D) Account:

An RFC(D) account is for residents who get foreign currency through gifts, travel, or other specific means. It’s a no-interest current account where you can keep your foreign currency, though you’ll need to convert the balance to Indian Rupees by the end of the following month unless used for approved purposes.

4. Diamond Dollar Account (DDA):

Specifically for exporters, this account holds US Dollars and helps manage foreign exchange related to export activities. It’s a current account with no interest but requires converting the foreign currency to Indian Rupees by the end of each month, while also adhering to certain regulatory requirements.

5. Foreign Currency Account for Exporters (FCA-E):

Another account for businesses involved in exporting, this account allows them to receive and manage foreign currency from their international transactions. It’s designed to simplify the handling of funds earned from global sales.

6. Foreign Currency Special Deposit Account (FC-SDA):

This account is used for specific foreign currency deposits under special conditions. It’s handy for situations requiring foreign currency deposits for regulatory or particular purposes.

Banking Currencies for FCA Accounts

Banks can't provide an FCA account for every foreign currency. They can only trade in a limited amount of currencies, this table provides a quick overview:

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Advantages of a Foreign Currency Account

Simplified International Transactions

With a foreign currency account, you keep your money in the currency you’re working with. This makes everything easier, from accounting for payments and receipts to currency conversions.

Reduction in Currency Conversion Costs

Conversion fees can add up quickly, especially when dealing with large amounts and multiple currencies. Such a situation is quite for international businesses. A foreign currency account helps you avoid these costs by allowing you to hold and use your funds in the currency you need.

Enhanced Cash Flow Management

Every business aims to keep a steady flow of cash or liquid capital. This makes holding a considerable amount of foreign currency essential for those involved in international trade. FCA accounts are the ideal solution in this regard, by allowing you to hold term deposits in multiple currencies.

Increased Investment Opportunities

If your business is looking to invest internationally, having an FCA account makes it a lot easier. You can hold and manage funds in different currencies, which simplifies investing in global markets.

Disadvantages of a Foreign Currency Account

Exposure to Exchange Rate Fluctuations

In an FCA account, your funds are held in a specific currency. Changes in exchange rates can greatly impact the value of your balance. If the currency you’re holding drops in value, it could affect your financial standing.

Limited Availability of Currency Options

As explained in the table above, banks cannot provide foreign account services for every international currency. This can be a problem if you deal with less common currencies or need to handle transactions in various international markets.

Higher Fees and Charges

Foreign currency accounts come with higher fees compared to standard accounts. These might include maintenance fees, transaction fees, and charges for specific services.

Lack of Interest Earnings

Most foreign currency accounts don’t earn interest. Unlike traditional savings accounts, where your balance might earn interest over time, foreign currency accounts generally don’t offer this benefit.

Additional Documentation and Requirements

Opening and maintaining a foreign currency account requires extra paperwork and compliance.

Do Alternatives Exist?

Foreign currency accounts have been around for a while and have gotten a little outdated. Modern alternatives like Karbon Forex use the latest banking technologies to make it easier to send and receive money in foreign currencies. While FCA accounts only work with a handful of currencies, Karbon provides FOREX services for multiple currencies. It also makes it cheaper for you to send money to your foreign currency account.

Karbon is one of the best alternatives to traditional banking when it comes to sending and receiving money from abroad. With cheaper rates, lower processing times and less restrictions, it may be the right option for your business. Contact us anytime and speak to an expert!

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