NRIs rush to take advantage of falling Rupee

Remittances increase as investment in realty, stocks zoom

By R Chandrasekaran

CHENNAI: While the falling Indian Rupee gives alarm bells to the policy makers in India, Non-Resident Indians seem to be taking advantage of the situation and remit as much as possible. Some are said to be even borrowing money to remit funds to India either to invest in realty or the capital markets.

During the past six months alone, remittances have recorded over 10 percent growth. This comes on the heels of India getting $69 billion of remittances in 2012 and topped the global list. Of course, it was not surprising since India remained a top beneficiary in 15 of the 23 past years and in the last five years, it was the biggest recipients.

One of the primary reasons for such a growth in the remittances last year was the de-regulation of interest rates on NRO and NSE accounts in 2010, while banks were looking for deposits from these accounts. This helped NRIs to get better interest rates than the deposits tied up with the London Interbank Offered rate or LIBOR rates.

The current year’s growth in remittances is fuelled by higher income group among the Indians living in West Asia and the developed countries with a clear cut view to invest in real estate and possibly in stock markets too. This should also be a shot in the arm for the Reserve Bank of India’s efforts to lure NRIs even as the central bank takes steps to limit the outflow of FIIs.

The Indian Rupee fell roughly 13 percent since May when it weakened to Rs.61.21 recently from a less than Rs.55 against the US Dollar in May. The Indian currency is the worst performing currency in the recent past especially among the major Asian currencies.

This sharp fall in Indian currency within a short span of time has allowed NRIs to park their funds in India either in realty or capital markets. For instance, a flat in India worth Rs.5.5 million, worth approximately $100K in May can be purchased around $90K now. This means that NRIs can get a discount of about 10 percent merely in currency transaction alone. This apart, the NRIs could negotiate with the promoters, which is a normal thing as in the past.

The growing interest among the NRIs in the Middle East to invest in Indian property market is confirmed by international realty professional Jones Lang LaSalle (JLL). A report has also indicated that during a recent Dubai property exhibition, a Coimbatore youth, currently working in Dubai, has signed to purchase 10 apartments in an integrated township on the busy Grand Southern Trunk Road apart from two town houses in a gated community in Oragadam from Arun Excello, a Chennai property developer. The developer too confirmed that the response in the current year exhibition is better than the previous years. However, he cautioned that investors are selective and ready to inject money only in projects that are making good progress.

Similarly, even if the NRIs borrow money in dollars in the Middle East and remit money to India, they stand to get an additional Indian currency of approximately ten percent, which should cushion them against the interest they may have to pay to the lenders.

In the same way, Indian stocks could come at a discount of about 10 percent to the NRIs when they transfer money and invest them in stock markets. Similar is the case with regard to investing in bonds or fixed deposits.

Looking from every perspective, the NRIs look to maximize gains more than they could in the past by sheer currency’s valuation alone. Though there could be doubts whether there will be any further fall in the Indian currency with the government taking steps such as directing banks and jewelers to stop selling gold coins and bars, the NRIs are set to take advantage of every weakness in Indian currency on a month-to-month basis.

If the NRIs could maintain their tempo of remitting ten percent more than last year, it is likely that India could generate around $76 billion in the current calendar year. However, the remittances are not coming from the NRIs alone, and therefore, experts predict India to gain roughly around $74 billion of remittances in the current year.

The weakening of Indian currency is not just the fall out of the domestic problems such as slowing economy, absence of strong inflow of foreign direct investments or foreign institutional investors (FIIs) and the weak exports compared to imports, which was partly due to higher gold imports.

The U.S. Dollar has strengthened significantly after the rating agency Standard & Poor’s upgraded the U.S. sovereign credit rating apart from the U.S. Federal Reserve indicating tapering of bond buying program or ending of easy money policy. The U.S. dollar had strengthened to a three-year high recently compared with a basket of currencies such as Euro, Yen and the Sterling.

Looking at the history of remittances, in 1991, i.e. just at the beginning of the economic liberalization after a balance of payment crisis hit the nation badly, the remittances to India was just $2.1 billion and worked out at 0.7 percent of the gross domestic product or GDP. The result of the liberalization policy was very much there in 1995-96 when its remittances reached $8.5 billion and represented 3.22 percent of the GDP. Since then, it was no stopping except in 2004-05 when the remittances dipped from the previous year. Otherwise, it was a smooth flow and contributed a little over 3 percent of the GDP since 2001-02.

Though the external factors contributed to the sharp fall in Indian currency, domestic factors too contributed to the currency’s performance in the recent past as the government failed to create an environment to attract more foreign funds inflow. Despite allowing foreign direct investment in retail sector, India is yet to see significant investment proposals from foreign companies. Similarly, the permission to lift FDI limit in aviation sector fails to see the light going by the Etihad – Jet Airways deal getting delayed.

Whatever may be the reasons for the weakening of Indian rupee, the NRIs stand to gain, both in the immediate and the long term since their investments in realty and capital markets could fetch better returns in the years to come.

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