by Sanjeev Kumar Gopalakrishnan, Investing
02 Oct , 2017

Should an NRI borrow & invest when rupee depreciates?

Whenever rupee depreciates, NRIs rush to take short term loans and convert it into rupee. They feel that they made profit out of that. Often, this is not true. If rupee depreciates further then, all the joy will vanish.

NRE deposits offer you about 7.6% interest p.a. tax free. But you should deduct the rupee depreciation rate from that to arrive at the actual interest you get.  In the last 5 years rupee depreciated by 7.89% p.a. on an average against US dollar. If rupee depreciates like that and your deposit gives you 7.6% p.a interest only, then the effective return is -0.29%! You will be losing money.  If you have borrowed to invest then your loss will be much higher as you have to pay interest on the borrowed funds.

Instead of NRE Deposit you should try FCNR deposit. Currently the FCNR deposit in US dollar fetches about 2.09%p.a. for a 3 year deposit. If you add the rupee depreciation to this you will in fact get about 9.98%p.a returns. So if you can borrow at rates like 2%p.a or 3%p.a you will make some profits.

India is a developing nation. India needs to grow faster. High growth rate means exports have to increase. This can be achieved by making Indian products and services cheaper. For this rupee value has to be kept low. Though you may see rupee appreciation during certain short periods, in the long term rupee will continue to depreciate unless fundamental changes happen in the economy.

As an NRI it is better you have a regular account with a good bank in that country. You should transfer to the Indian bank account only that amount you need to send to India for your loan repayments or parents or savings in India. This will help you preserve your foreign exchange.  If you send money to India you can’t convert it into foreign exchange unless the money is in a NRE account or PIS account.

But if you are borrowing at cheap rates to make bulk payments to reduce your home loan outstanding or pay off liabilities in India then the strategy is not bad.

 About The Author

Sanjeev Kumar G, an IBS Chennai Alumni, is a Certified Financial Planner (CFP) from India, since 2005. He has 22 years of experience and is an expert in various personal finance areas like portfolio construction, investment research, life insurance and financial planning.


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