Non-resident Indians cashing in on the rupee’s woes

India’s currency has been on a long run in the doldrums and many nationals living abroad believe now is the time to take advantage of favourable exchange rates. However, there are pitfalls.

Tahir Mohammed, from Kerala, sends money home from Dubai’s Ibn Battuta Mall. The weak rupee has been a boon to Indians abroad. Pawan Singh / The National

With the decline of the rupee, Indian expatriates are sending more money back to their home country.

The current exchange rate means that non-resident Indians (NRIs) can buy more rupees with their foreign currency and it is an ideal time for many expats to be sending money home. But it may not necessarily be the right move for everyone.

“One needs to be clear,” says Gaurav Mashruwala, a financial planner based in Mumbai. “The money that is being brought into India – is it eventually going to be spent in this country or is going to go back? If the money is going to stay in India, probably because the NRI has some commitment, such as having bought a house, they have dependent parents, or they have dependent family members – then it certainly makes a lot of sense to remit that money into the country. Converting your foreign currency into Indian rupees and keeping it in NRE [non-resident external] accounts where the interest is tax-free makes a lot of sense right now.”

Interest rates on NRE fixed deposits at HDFC, one of India’s major banks, range from 8.25 per cent to 12.63 per cent, depending on the amount of money and the length of time invested. These rates are far higher than Indian expats can secure in countries such as the UAE.

Bank transfers are an easy way of forwarding money but if expats are planning to carry cash into India, they should be aware of regulations introduced in May that prevent nationals from carrying more than 7,500 rupees into the country, while travellers carrying cash in foreign currency exceeding US$5,000 are required to declare it.

A special swap window for banks introduced by the Reserve Bank of India, which is valid until November 30, has resulted in higher interest rates for NRI deposits, bankers say.

Sonalee Panda, the group head of private banking and wealth management at Ing Vysya Bank, says that consequently it is a good time to send money to India, but advises expats to spread their investments.

“On the fixed income side NRIs have two options,” Ms Panda says. “In the case of NRE deposits, NRIs can bring in money in US dollars or any other currency and convert it into Indian rupees and earn tax-free interest and [they] are repatriable. The other option is a foreign currency non-resident deposit, ranging between one and five years – the principal and interest on these deposits is fully repatriable. Interest earned on these deposits is tax-free in India.”

Despite the attractiveness because of the favourable exchange rate and high interest rates, expats should think carefully about whether they actually need money in India, Mr Mashruwala says.

“If you’re not going to be using it here, don’t bring money into the country,” he advises.

“Suppose there’s an Indian living in Dubai and they’ve got another decade or two decades of working life left and hence he’s not really certain whether he’s going to go back to India soon or his family’s going to go back or if the kids might go to India or the UK or US for higher education.

“The general trend that has been observed is that individuals and families who are in the [Arabian] Gulf eventually come back to the country but those whose kids migrate to the US or Europe don’t tend to come back and they tend to settle there and live there for generations. A lot of people in the Gulf would want to send their kids to the UK and US for higher education. Those individuals may want to invest in India just to get returns from India but they don’t require money in this country.

“For them, it doesn’t make a lot of sense to convert their foreign exchange to Indian rupees. There are a lot of offshore mutual funds, which are domiciled in the UK, US, Mauritius, Cayman Islands. These are a legitimate ways of investing.”

Mr Mashruwala explains that investing offshore funds helps expats to avoid many complicated bureaucratic procedures they could face with regulations in India, including documents demanded by banks and tax implications. Furthermore, mutual fund schemes generate the same returns as accounts in India, he says.

Also, expats could be hit by exchange rate fluctuations if they send money home then have to convert it again into the currency of the country where they are working, he adds.

This is also a risk that could affect expats who are borrowing money at low interest rates to send to India to take advantage of the country’s high interest rates.

“A lot of people don’t realise that while loans in the UAE are fairly reasonable, after a year or two, if the rupee has gone down by 4 per cent, then this entire exercise goes bad and why take that major risk?”

A Surendran, the head of retail and international banking at Federal Bank, says the higher interest rates resulting from the central bank’s swap window have encouraged many non-resident Indians to invest who might otherwise have been worried about exchange-rate fluctuations.

“Another option, mainly for NRIs looking for maturity value in rupees, is to keep [the money] in foreign currency non-resident deposits and link it to a forward contract of matching maturity to take advantage of the very high rates of forward premium prevailing now,” Mr Surendran says, adding that Federal Bank has a deposit scheme, Federal Rupee Plus, which offers up to 15 per cent annualised yields.