MUMBAI // A larger-than-expected rate cut delivered by India’s central bank on Tuesday will have mixed blessings for Indian expats in the UAE, according to experts.
Interest rates on savings and home loans in India are set to fall after Raghuram Rajan, the Reserve Bank of India governor (RBI), cut rates to the lowest level in more than four years, reducing the benchmark repo rate to 6.75 per cent from 7.25 per cent. Most analysts expected a cut of only 25 basis point.
The cut, the fourth this year, was welcomed by industry in India and is widely expected to help boost the economy after growth slowed in the second quarter of the year to 7 per cent compared to 7.5 per cent the first quarter. Pressure had been mounting on the RBI to cut rates as inflation levels have eased.
Stocks rose on Tuesday, with the benchmark BSE Sensex closing up 0.63 per cent at 25,778.66.
Banks in India are expected to lower interest rates for consumers following the move.
“This will mean that fixed deposits may not be as lucrative for Indian expats, so unless they really need that money in the country, they should look around because India also has a foreign exchange risk,” said Gaurav Mashruwala, a financial planner based in Mumbai.
A number of NRIs (non-resident Indians) in recent years have borrowed money in the UAE to send to India to put in fixed deposit accounts and take advantage of the interest rate differential. But if the rupee weakens further, and given the fact that interest rates on these savings are expected to fall, NRIs could end up losing money when they have to return those funds to the UAE, Mr Mashruwala explained.
Some NRIs have been burnt by this, he added.
The rupee on Tuesday was trading at about 66 against the US dollar compared to about 61.5 a year ago. The UAE dirham is pegged to the dollar, so the rupees’s movements against the dollar are reflected in the exchange rate with the dirham.
“Even though the interest rates have come down, a section of people still do park their cash in fixed deposits,” said Adeeb Ahamed, the chief executive of Lulu International Exchange. “There are higher-yielding investments in India, like real estate, which many NRIs are looking into and they are keen on buying homes across key cities, so that they get good returns later.”
The main advantage of the interest rate cut will be for NRIs planning to borrow money in India, for example to buy property. It is not clear whether banks would pass on the full cut and reduce loans by as much as 50 basis points, however.
“Definitely there will be an advantage for those NRIs who have housing loans in India,” said Promoth Manghat, the chief executive of UAE Exchange. “That will help with increasing their disposable income because their servicing cost is going to come down.”
He said as fixed deposit rates come down “there would definitely be a change in the pattern of investments”.
Mr Ahamed said that many NRIs had taken advantage of the sharp fall in the rupee a few weeks ago to remit money home after the devaluation of the Chinese yuan led to a slump in Asian currencies.
“Remittances have been on a downward trend for the past four to five days in spite of a strong US dollar, and showed a slight spike only a few days prior to Eid,” he added.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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