Atish Banerjee recently considered taking out a loan in the UAE to park in a fixed deposit savings account in his native India.
The 30-year-old, who moved to Dubai from Mumbai nine months ago, says he had heard it was a lucrative practice.
But after examining the details more closely, he decided against the plan.
“It sounds like a good idea, but my concern is the value of the rupee is not so high right now and interest rates in India have come down,” says Mr Banerjee, who works as an art director at an advertising agency. “I will wait it out. I’d rather do a fixed deposit here in the UAE for now. When things are a bit more stable and the rupee is a little higher, I’ll look at it again.”
In recent years, a number of non-resident Indians (NRIs) have taken out loans in the UAE at relatively low interest rates, which they then place in fixed deposits in India carrying higher rates of interest.
For example, say a UAE resident borrowed Dh100,000 from a bank in the Emirates at a rate of 2 per cent per year, then deposited that amount in an Indian savings account that carried a rate of 9 per cent. At the end of one year, the resident would have paid Dh2,000 in interest to the UAE bank, but would have earned Dh9,000 in interest in India, so the net gain would be Dh7,000.
But because the rupee has weakened in the past year, those loans have become more costly to pay off when exchanging the cash back into dirhams. With many expecting the rupee to weaken further and with interest rates declining, the practice is unattractive now, experts say.
“While this interest rate arbitrage – taking loans in UAE to earn higher interest in Indian banks – might have made sense when the rupee was at 58 to 60 range [against the US dollar] and the rate of interest in Indian banks was 8 to 9 per cent, it doesn’t make sense any more,” says Shrey Jain, the founder and chief executive of SAS Online, a brokerage in India.
“There are winners and losers on both sides of the coin in a falling rupee. NRIs who took dollar loans earlier and put the money into Indian deposits are now losers as the money is worth less than the actual principal amount due to lower interest rates and a falling rupee. Some might be in a total net loss.”
This week the Indian rupee has been trading at levels of about 68 against the US dollar compared to below 62 a year ago.
The UAE dirham is pegged to the US dollar, so any changes in the dollar rate against the rupee are tracked by the dirham, which is currently trading at 18.60 rupees. The Reserve Bank of India cut interest rates four times last year by 125 basis points to 6.75 per cent.
“As interest rates have fallen, it is no longer as lucrative to park money in Indian deposits,” says Mr Jain. “Furthermore, keeping in mind the decreasing inflation and RBI’s outlook, interest rates look to fall even further going forward. Thereby, this would definitely impact the trend of NRIs borrowing money in dollars and putting it into Indian deposits and bring down the volume considerably. The net margins for this kind of investments have shrunk by more than 50 per cent.”
Dinesh Rohira, the founder and chief executive of 5nance.com, an online financial management platform, says many NRIs will have ended up with negative returns of between 3 and 9 per cent after taking out one- to two-year loans to try to capitalise on interest rate differentials.
“With the currency being volatile and the Indian rupee depreciating, and no signs of stability or improvements towards their forex rates, many NRIs are stuck by converting these short-term loans to long-term debt. They are thereby waiting for the INR to appreciate or convert it into local currency back home and service the loan taken for investing into the high return deposits,” he says.
Japinder Kaur, 27, the co-founder of Jap Films, a film production house in Dubai, is one of those burnt by the rupee’s fall. Her roots are in Ludhiana, Punjab, although she was born in Dubai, where she has lived for most of her life.
“My experience of sending money to India and investing there has not been very positive,” admits Ms Kaur. “I started sending in money when the exchange rate was 14 rupees to one dirham. When it was time for me to collect my collections and transfer money back to my Dubai account in dollars, the exchange rate was 18 to Dh1, which resulted in a considerably great drop in my profit.”
To get an idea of that drop, let’s say Ms Kaur sent Dh50,000 to India when the rupee was 14 to the dirham. She would have deposited close to 700,000 rupees, not factoring in remittance fees and charges. But if she then decided to bring those 700,000 rupees back to the UAE now, with each dirham costing about 18.50 rupees, the money would fetch less than Dh38,000.
Ms Kaur now believes the Indian market is becoming increasingly unreliable for any investment because of the currency drop.
“It is acceptable for certain people to invest in the Indian market if they are regularly studying patterns and understanding the day-to-day change in currencies,” Ms Kaur adds.
Raghvendra Nath, the managing director of Ladderup Wealth Management, based in Mumbai, says that there are still good opportunities for NRIs when it comes to longer-term investments in India.
“NRIs have to embrace the fact that the Indian rupee will depreciate in the long run,” says Mr Nath, “As long as the inflation differential is there, something that is not going go away in a jiffy, the depreciation is a reality. However, it is also a fact that all NRIs are going to return back to India one day. So they should not unduly worry. The portion of their savings that are long-term in nature can always be invested in India.”
Weakness in the Indian rupee can, of course, benefit UAE-based NRIs, who can now buy more rupees for their dirham.
Vaibhav Rao, 34, a senior executive at an investment firm, who has worked in the UAE for eight years, and is from Mumbai, explains he is reaping the rewards of a weaker rupee at the moment because he sends a fixed amount of dirhams back to India each month. This is then deposited into savings and equities, intended for the future when he eventually returns to India.
“I’m obviously getting more rupees, so that is certainly better,” he says.
Mr Jain agrees that a falling rupee can be good news for Indian expats that manage their money well.
“NRIs can be winners if they invest prudently in Indian equities and repatriate their money now as they will get more bank for their buck in a falling rupee environment,” he says. “Their wealth in foreign currency is worth much more in a falling rupee scenario and that can put brought back to India and put to work in the Indian markets. Assuming one has a long-term outlook on the investment, NRIs should repatriate their foreign currency money back to India and invest in Indian equities via diversified mutual funds.”
However, Mr Jain advises against investing in India’s property market as an alternative.
“The real estate market bubble has burst and prices are at lows with no end in sight. In this scenario, property investments don’t make sense for NRIs right now as the investment is highly illiquid and the returns not worth the risk. There is no positive outlook for the Indian real estate market as of now and even people sitting on current investments are not able to find profitable exits.”
Mr Nath agrees that Indian property should be avoided by NRIs.
“The present market is a tricky one,” says Mr Nath. “Real estate is down; interest rates have come down; gold is down and now equities are also down.”
But he firmly believes that by investing in equities, NRIs can offset any depreciation in the rupee.
“One should keep in mind, that periods like these, when fear is all around, are the best times to venture into equities,” he adds. “The reason is simple. A top- quality stock that was available at 100 just six months before is now available at a bargain of 60 or 80. Basically there is a sale going on in the equity markets.”
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