Friday, August 30, 2013

The NRI's Market

This article was first published in India Abroad, August 30, 2013, pg. 21

Rupee depreciates to Rs65.56 per dollar before recovering for the day. An average Indian would ask, "Why should I worry about the exchange rate? I am neither going on a World tour, nor am I sending my kids to study in America!".

Well, as the currency depreciates, the price rises ensure that you need more and more of it to buy the same quantity of goods. The purchasing power comes down due to inflation and pressure on the interest rates. As in the case of India, due to the depreciating Rupee, the Reserve Bank of India may not be able to decrease the interest rates, in spite of demand from the industry to do so.

So a mango Indian says, "Okay. I got it. I feel the pinch of the rising prices. I feel my car is a white elephant. Petrol prices go up every month. I wish my company paid me salary in US Dollars".

Now that is the best scenario. Earn in US Dollars and spend in Indian Rupees. The exporters and the manufacturers who have their facilities in India, that is their expenses are in Rupees, but export their goods and services, that is earnings are in Dollars, fall in this category. As do the Non-Resident Indians (NRIs).

According to the World Bank, the Indians form one of the largest immigrant population in the world (next only to China), around 1 percent of the total population of India. The estimated total remittance of money by NRIs, from more than 190 countries, in the year 2012 is a daunting figure of $69billion, higher than that of China, as per data from the world bank. It is approximately 3 percent of our GDP and 75 percent of our Current Account Deficit (CAD).

It does not come as a surprise then that the government is trying to woo the NRIs to repatriate more funds into the country to support the burgeoning CAD and the falling Rupee. The government has deregulated the interest rate on non-residence external (NRE) and Foreign Currency Non Residential (FCNR) Account deposits to incentivize the NRIs to park their funds in India.

Taking cue from this, many banks have increased the interest rates that they offer on these accounts. For example, IDBI bank increased the interest rates to 9.5 percent (by up to 50 basis points) for long term deposits in NRE accounts.  It also increased the interest rates by 100 basis points for the FCNR accounts.

As a result, the repatriation of funds from NRIs based in US, UK, Singapore, Dubai have increased in the last month. It clearly makes good investment sense for the NRIs as the interest rates offered by banks in countries like US, UK, Singapore and Dubai can range from a meager 0.5 percent to 2 percent at the most.

The falling rupee has also rekindled hopes of owning a property in India for many NRIs who want to maintain a home in India and would eventually like to come back to their own country. A survey conducted by the Associated Chamber of Commerce and Industry of India (Assocham), revealed an increase in the interest of the NRI community in real estate. The real estate has become more affordable to them in Rupees terms. The property prices as such are depressed in India due to high interest rates on home loan and lack of demand internally due to the state of the economy.

It may also be a good time to invest in the equity markets for those who can take the risk and tide over the uncertain times with nerves of steel. Many stocks are at their 52 weeks low. Many others are selling at very low P/Es and discounts to their book values.

Overall, as Simon Newcomb, a Canadian-American astronomer and mathematician writes in his book, "The A B C of Finance", published in 1877, "...a depreciating currency is the greatest source of injury to the business of a nation, being nothing less than a national calamity".

But, it is good news for those earning in currencies against which Rupee is depreciating.
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