Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Should NRIs convert surplus funds into rupees now?

Transfer part of the funds you intended to convert right away and stagger the rest.

I was a 25-year-old in the mid-1990s. India had recovered from the brink of bankruptcy during which time there were controls on what you could import and how much; each letter of credit was carefully scrutinized by the bankers. After all, India’s foreign exchange reserves had dwindled to just three weeks of imports. On the personal front, too, foreign holidays meant you were officially allowed to take $250 out of the country every two years. Yes, for the entire trip.

No wonder then that I was enamoured by the Tarapore Committee on rupee convertibility which was set up in 1996. That, according to me, would be India’s “arrival" in the world. There was a 3-year program the committee recommended based on economic consolidation, but the South East Asian crisis in the summer of 1997 put an end to all this. India survived this crisis largely because free flow of currency was not permitted then; Indonesia, Thailand and Korea underwent turmoil.

The sharp devaluation of the Indian rupee in recent times awakened all these memories. Let us try to understand the movements in simple terms. The QE (quantitative easing) programmes of the US, Europe and recently Japan meant that there was more money in the system. Logically, these funds moved to countries that were financially stable and whose interest rates were higher. If your interest rates in country A is 0.5% per annum and in country B 8% per annum, you would obviously move funds from A to B and get the additional returns, provided that the currency depreciation of country B is lower than 7.5% per annum (the difference in interest rates). And if rates in B (India) were expected to fall on account of lowering inflation and focus on growth, you would have the potential to make double digit returns.

India’s actions on a sharp diesel price hike in September along with making petrol prices market-linked meant that subsidies would fall and that would reduce pressure on interest rates even more. More flows followed in the last quarter of 2012. With international commodity (including oil) prices depressed, oil subsidies seemed to be a thing of the past. Returns on fixed income funds were in healthy double digits.

That’s when Ben Bernanke announced that the QE program will taper off by 2013-end and shut by 2014. This meant that the bond buying program will be reduced in the next few months and stopped next year. There was no talk of increase in interest rates (which analysts interpret will not happen before 2015). The yields on US bonds shot up and as funds moved from India to the US, the currency of the former depreciated sharply. The rate differential less the currency change was negative, which led to even more outflows and a further weakening of the rupee. In my opinion, all market movements are pendulum-like—swings are more than warranted on the way up or down, before they settle.

At a time like this, should you as a non-resident Indian (NRI) convert surplus funds that you have into rupee? Should you pay attention to the “experts" who are happily quoting 63-70 as near-term levels? A simple way to deal with markets is to cut out the present noise.

The rupee has actually appreciated in five of the last nine years. Overall, the depreciation is just 2.1% per annum. However, we must give higher weightage to the more recent past and hence an annual depreciation of 6-7% per annum (past 5-year depreciation of 6.9% per annum) seems to be realistic, at least till such time as the current account and fiscal deficits are not reduced. Already, we have seen the rupee depreciate by nearly 11% in 2013—almost all the losses have been in the past two months.

Now gaze into the crystal ball. We know that the threat of QE tapering off and rate increase will play itself out in the next two years. That would mean that US interest rates will be at the current levels or marginally higher. If India wants to take itself seriously (before other countries do), it will need to accelerate the arrest of the fiscal and current account deficits, cut subsidies, and pursue growth rapidly. Foreign flows for infrastructure development will have to be encouraged. The result will be increased participation in Indian markets by domestic investors.

Some NRIs converted into rupees at the height of the market boom in 2007 at 40 per dollar and added more around 50 levels. At the current levels of 60, they are suddenly into a “freeze" mode. If you have a currency expert at hand, sure do take his advice. Else, as a financial planner, I will ask you to transfer part of the funds you intended to convert right away and stagger the rest.

Lovaii Navlakhi is founder and CEO, International Money Matters Pvt. Ltd.

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