NRIs to benefit from the favourable exchange rate

The Indian rupee declined to its lowest-ever level of Rs14.35 against the dirham (Rs52.71 against the US dollar) at 10.20am UAE time (6.20am GMT) on Tuesday morning, with a number of experts warning that it could tumble even further in the coming weeks.

As fears about the eurozone debt and the global economy as well falling local stock markets provoked further selling of the currency, the local unit plunged to 52.50 against the greenback as foreign exchange markets opened, causing further problems for the Indian central bank as it tries to rein in near double-digit inflation. Analysts warn that deteriorating economic indicators in India and across Europe bode ill for the Indian currency, which, with a decline of 17.8 per cent since the beginning of 2011, is already the worst performing major Asian currency this year.

A section of experts believe that now that the rupee is in uncharted territory, it could fall to as low as Rs58 against the US dollar – or Rs15.79 against the dirham – in the first half of 2012. This suggests that the rupee could decline by more than another 10 per cent in the next six months or so, which will in turn hammer Indian equities and local investments.

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. After all, the last time the rupee weakened to such levels was back in Q1 2009 – when it plunged to Rs14.17 against the UAE dirham on March 9, but bounced back in less than three months and, in fact, strengthened to Rs12.78 on June 6, 2009.

In the past year or so, the rupee has traded in a wide range against the dirham – from Rs11.95 on November 7, 2010, to Rs14.34 this morning. One dirham fetched Rs12.17 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 almost 18 per cent since the beginning of the year and an even steeper 20 per cent since August 2, 2011.

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. Now you might want to accumulate your resources – the next salary for most employees is due within a week or so and you might want to wait for it.

With the Reserve Bank of India (RBI) in public claiming that they will not intervene to buoy the sagging rupee this time, experts say the currency has 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 10 per cent per annum mark. With most investors today hoping for a return ‘of’ investment rather than a return on investment, that is definitely something worth considering, especially because 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. Global ratings agency Moody’s recently downgraded the country’s banking sector while its peer Standard and Poor’s has warned that India’s inadequate infrastructure is a major block to growth push.

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

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 Macquarie yesterday downgraded India’s economic growth forecast for the next fiscal to below 7 per cent while warning that the country’s GDP expansion outlook is on a slippery slope. 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.