Thereafter, to attract dollar inflows the Reserve Bank of India decided to do away with the linking to LIBOR rates and banks were free to price their NRE deposits.

In India, one thing is certain that there would be frequent regulatory changes. So, if the rupee recovers sharply against the dollar, it's quite possible that the authorities would once again link interest rates on NRE Deposits to LIBOR. Of course, it might be premature to say so, but, one cannot be sure what could happen in the next 1 year. Also, it's important to remember that NRE deposits are tax free deposits and do not attract any taxes, which make them attractive for NRIs as compared to NRO deposits. Therefore, investing in a 3-5 year NRE deposit would hedge against risks of a policy change linked to LIBOR.

Secondly, it's almost certain that interest rates in the economy would head lower at least in the next 1 year. Therefore, it makes sense for NRIs to lock into NRE Deposits over the longer term to hedge against falling interest rates and changing policy stance.

Thirdly, if you re-locate to India and have a long term NRE FD, you can save tax and need not break the deposit.

Take for instance a 3-5 year NRE Term deposit. India's largest private sector bank ICICI Bank is currently offering an interest rate of 9.5 per cent, which is certainly attractive. Similarly, IDBI Bank and Vijaya Bank also offer attractive rates of interest on NRE Deposits.

Clearly, it's a good proposition for Non Resident Indians to invest in NRE Deposits for the long term.

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