Finance, Forex and Investments

Invest in country with high interest rate on a savings account?

USA gives interest rate of 0.25% on a savings account. A savings account in India or Pakistan gives 10-15% on local currency savings accounts. That is a big difference. Why can't I make money by exchanging US dollars to local currency and opening an account in these countries? I know the currency buys and sells at different rates but shouldn't that huge interest rate should easily offset that. Please explain. Thanks!

Public Comments

1. Your money is not federally insured in other countries. If the bank goes under - you lose all your money.
2. Exchange rate swings CAN eat up all of the advantage of putting funds in foreign savings accounts. Even if you take a drubbing in the exchange rates, you still owe tax on the interest income using the exchange rate in effect on the date of the interest payment, NOT when you withdraw the funds. So you could wind up with significant taxable income from the interest and wind up losing on the exchange rate. Your savings in foreign accounts are not insured by the FDIC or NCUA. Any insurance would be at the pleasure of the government where you deposited the funds. If the bank goes bust, you may lose everything or be at the mercy of a foreign government's banking regulators. You also need to consider the economic and political stability of where you are putting your funds. While India is comparatively stable politically, economically it's still somewhat risky. Pakistan is unstable both politically and economically when compared to most western nations. More than one US person has lost a pile when a foreign government nationalized the banking system and seized all foreign-owned funds. If that happens, you have no recourse at all. Although typical savings account rates are below 1% in the US, better deals are out there if you look hard enough. Better yet, a carefully selected mix of equities (stocks) will yield 8% to 12% over time with an acceptable level of risk. Some dividend leaders (check out LEG or T) are returning 5% or more in dividends alone. My shares of those in DRIPs have returned over 8% over the past decade in dividends and dividend reinvestments.
3. The basic difference why the interest rates for deposits are higher is because banks in those countries also provide loan rates that are higher. Typically the loan rates in those countries are 15-18%. Why the high loan rates? Basic reason, the risks are greater. Secondly in terms of currency conversion for purpose of opening an account, these countries you speak of welcome foreign investments but have a lot of restrictions when it comes converting it back into US dollars and sending it of back to the US.
4. yAP u can deposit on those country . u hv only of exchange rate .... yes that may offset depend on exchange rate diff
5. Arbitrage as well as any expenses will eat up most of your profits. Read up more on arbitrage to understand how this works.
6. Yes indeed the interest rate are higher in these countries but also remember that the risk factor will also be high.