The battered Indian rupee made a fresh lifetime low of Rs16 against the UAE dirham (Rs58.80 against the US dollar) at 9:35 UAE time (5:35 GMT) in early trade on Tuesday following what the market expects to be a robust US economic recovery, leading to a curtailing of its famous quantitative easing programme, coupled with weakening fundamentals of the Indian economy.
Slow economic growth, a high rate of inflation, sluggish exports, mounting imports, and Indians’ penchant for gobbling up gold at whatever price… a combination of factors is fuelling persistent dollar demand from Indian importers and banks.
A number of foreign institutional investors have reportedly begun pulling out their investments from the country’s capital markets back into the ‘safe again’ American markets, which will further deteriorate the situation in India.
The rupee has been under consistent pressure due to a rising dollar and India’s own economic woes, and the country saw its current account deficit bloat to $17.8 billion in April despite a slew of recent measures initiated by India’s finance ministry, including an effective 8 per cent tax on gold imports to dampen the precious metal’s appetite among the country’s citizens.
Analysts warn that deteriorating economic indicators in India, which saw its current account deficit bloat to $17.8 billion in April, will further chip away the rupee’s worth in the near term unless the country’s central bank, the Reserve Bank of India (RBI), intervenes in the market.
However, with analysts expecting the country’s deficit to have further deteriorated in May to $20.8bn (official data is yet to be released), any intervention by the RBI might be short-lived.
A section of experts believe that now that the rupee is in uncharted territory, it could fall to as low as Rs60 against the US dollar – or Rs16.33 against the dirham – in the next couple of months.
Indeed, it is time for non-resident Indians (NRIs) to look at options to maximise this favourable remittance window, which may or may not last long. In the past 18 months, the rupee has traded in a wide range against the dirham – from Rs13.23 on February 5, 2012, to Rs16 this morning.
One dirham fetched Rs14.96 on January 1 this year – in other words, NRIs earning in US dollars (or dollar-denominated currencies such as the dirham, riyal or dinar), have got a salary hike (in rupee terms) of 7 per cent since the beginning of the year, and an even steeper 21 per cent since February 5, 2012.
But as every expatriate knows, this gain is only notional – after all, we spend a majority of our earnings in the currency we earn and in the country we earn it, and only remit perhaps a small proportion of our income every month. So, obviously, it is that small proportion that has gained – not the entire income.
Still, a falling rupee – hurts as it does India’s economy as imports into India become expensive – is an opportunity for NRIs to benefit from the most favourable exchange rate ever. Here’s how:
#1. Remit, remit, remit
Whether you want to buy a house or a just few shares in the Indian markets, the first step to making any kind of investment is to transfer funds into an NRE / NRO account in order for them to be gainfully deployed.
With the Reserve Bank of India (RBI) not having a huge leverage with which to calm down the ongoing forex frenzy (India’s foreign exchange reserves were at a 13-month low of $287bn on May 31), experts believe the currency may have some way further to fall.
In that case, it may be safe to wait for an even better exchange rate although foreign exchange markets are extremely volatile at the moment and there’s no guarantee that the RBI, and with it the rupee, will not take a U-turn.
Still, it might be a good idea to club your remittances in a single tranche rather than break it up into different, smaller slivers as there is a fixed cost associated with remittance.
#2. Explore fixed income options
Indian banking is at the peak of the interest rate cycle, with the country’s banks offering very attractive deposit rates on fixed income products – around the 9 per cent per annum mark. While equities in your country of residence do offer the chance of better returns, especially if the UAE gets classified as an MSCI emerging market tonight, share markets remain volatile and fixed income offers guaranteed returns to those not looking to take on additional risk.
The fixed income option does get interesting considering the current favourable exchange rate makes the principal all the more beefier.
Moreover, these investments are extremely safe, and with India’s interest rate differentials with other markets at quite attractive levels, this is an option that NRIs should consider as part of a broader portfolio of investments. A fixed income investment made now will hold good for the tenure of the deposit even if the RBI starts revising interest rates downwards from January next year, in line with economists’ expectations.
#3. Prepay that mortgage
A good number of NRIs have taken out home loans with Indian banks for properties in India. With a peaking interest rate cycle, the interest burden on that mortgage has grown especially onerous in the past couple of years. It may be time to borrow cheap – UAE banks and those in other Gulf states with a fixed peg to the dollar try to track US interest rate movements and are therefore currently offering personal loans at low interest rates.
Even though interest rates in the Gulf are higher than those in the US, they are much cheaper than those in India – so it might make sense to borrow from a local bank here and remit a lump sum taking advantage of the favourable exchange rate to prepay your mortgage in part or full.
However, when deciding to go for a prepayment by borrowing afresh, make sure you do the math on the difference in interest rates between your banks in India and the UAE/other Gulf states, and add to the equation any prepayment penalty/fees your Indian bank might charge you. Prepay only if you’re making a reasonable saving in interest outgo.
#4. Invest in Indian equities
This advice comes with a strong disclaimer – the Indian stock market is already undergoing a correction, and could easily fall another 10 to 15 per cent from here on. But as the world renowned investor Warren Buffet once famously remarked – be fearful when others are greedy, and greedy when others are fearful. As markets reach their lows, it may be prudent to keep the cash ready and jump on the bandwagon once they’re on an upswing.
The one thing that investors will do well to remember is to never try to catch a falling knife – i.e., do not try to time the stock markets, and enter only once the current rout is evidently over. And of course, do your research on the shares you’d want to buy – or, better still, take the advice of a good broker or investment manager.
#5. Buy a house – or two
Just as the previous investment option, investors will do well to study the market closely before taking a call. Experts maintain that properties in most metro cities in India are becoming overpriced and that real estate values in India could fall in the near future as economic growth slows down due to a lack of export demand coupled with domestic woes.
In fact, research firm Knight Frank yesterday said that a slowdown in India’s most speculative market, the National Capital Region, is symptomatic of the liquidity crunch faced by property developers coupled with weak end-user demand and consequent lack of new project launches.
All these factors are not limited to the NCR region, with other major markets including Mumbai and Chennai also facing the same issues. In this case, it might be prudent to scout for properties in second or third tier Indian towns where there hasn’t been much price appreciation so far and therefore the potential is higher while the downside remains limited.
Again, one of the things to keep in mind when taking on a fresh mortgage is that this favourable exchange rate will not stay forever, and so ensure you will be financially able to continue making the payments even once the rupee gets dearer by up to 25 per cent.
In the end, what you’d like to do with the extra rupees that your dirhams are earning today depends on your individual circumstances and investment objectives, but do remember the golden rule of investment – what goes up, comes down. And vice-versa.