How the Fall in Indian Rupee Has Impacted NRI Investors?

The INR has been slumping against the USD since the beginning of the CY 2022, and it has fallen from around Rs 74.40 levels to 77.56 levels, i.e., about 4.2% so far. Although INR is at a record low against the USD, the fall is relatively less compared to some other currencies like the Japanese yen, that has fallen about 12% against the US dollar this year.

There are several reasons behind the recent fall in the Indian rupee. The major factor behind the slump is the geopolitical risk pertaining to uncertain global conditions. The rupee has been under significant pressure since Russia's invasion of Ukraine. Both Russia and Ukraine being the key producers of energy, agricultural, and industrial commodities, the crises between these two nations resulted in increasing prices of essential commodities worldwide, thus leading to global inflation. India being the third-largest importer of crude oil, has been suffering from the record high prices of crude oil. Besides, many experts are expressing growth concerns in China due to the lockdown following a surge in Covid-19 cases that is jointly with Russia-Ukraine tensions contributing to the global inflation due to the supply shortage.

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Notably, the hike in interest rates by the U.S. Federal Reserve, rising global interest rates, the unending Russia and Ukraine War, higher crude oil prices, and surging Covid cases in China have led to the FPIs selling in the emerging markets and moving to the safer assets in the developed markets, thus also contributing to the rupee depreciation.

The recent slump has made spending in Indian currency more expensive for Indians. But, NRIs can capitalise on this opportunity. The depreciating rupee value makes the dollars you are repatriating in the rupee much more valuable if you want to send, spend, or invest money in India.

Historically, the fall in the rupee makes the NRI investments in USD (or other stronger currencies) look more lucrative. NRIs frequently borrow funds from foreign nations as the interest rates are much lower, and they further invest it in India for higher interest rates/returns. But, how has the current fall in the Indian rupee impacted NRI investments in different asset classes?

Fixed Income Products:

The interest rates are rising globally as the Central Banks throughout the world are taking measures to reduce liquidity in the market to control inflation. Similarly, the RBI too increased policy rates by 40bps forcing Indian banks to consider increasing interest rates across term deposits. As mentioned earlier, NRI investors borrow funds from foreign financial institutions and invest them in India for higher returns. The bank fixed deposit interest rates for NRIs have increased by 10 to 20 basis points depending on the term of the deposit. Even the other fixed income products like government bonds, corporate fixed deposits with revised interest rates, etc., would be more attractive to the NRI investors in terms of expected interest income. Moreover, due to the depreciation in the INR value, your deposits and bonds maturing in India will fetch you a higher value in terms of USD if you manage to convert them in the near future.

Debt Mutual Funds:

As debt mutual funds are more tax-efficient compared to fixed deposits and have relatively higher return potential, it is preferred by many NRI investors. Since debt mutual funds majorly invest in fixed income instruments, the funds following the duration strategy have been negatively impacted by the rise in interest rates. On the other hand, very short maturity funds and debt funds following an accrual strategy will be better off and could benefit from the rise in interest rates. You may witness higher volatility in your current investments in debt mutual funds having medium to longer maturity instruments. However, some portion of the losses that occurred to the debt fund value may be recovered due to the depreciated INR value if NRI investors are planning to redeem the units and convert it into USD any time soon.

Stock Market and Equity Mutual Funds:

Stocks and mutual funds are capable of offering much higher inflation-beating and tax-efficient returns to investors, making them one of the preferred investment options for NRIs. The fall in INR and the recent correction in equity markets have made the Indian stocks and equity mutual fund investments even more lucrative to NRI investors who have been sitting on the sideline to invest their fresh money. On the other hand, your money invested in offshore equities denominated in USD would command a better value when calculated in terms of INR.

That said, the geopolitical risk and the current unstable Indian market do not make it a good idea to invest in any risky investment avenues like stocks and equity funds with borrowed money. In fact, it is not advisable to invest borrowed money in high-risk investment avenues under any circumstances.

Gold and Precious Metals:

Gold prices typically enjoy a better correlation with USD. Accordingly, in India, depreciation in the INR value has an adverse impact on the price of gold and other precious metals. Hence, the fall in the rupee value makes the gold investment even more beneficial to NRI investors abroad. Thus, many NRI investors consider investing in gold when the gold prices or rupee value move downward and make profits when the prices go up.

Real Estate:

A hike in the benchmark interest rate by the RBI for the first time in the last two years has made borrowing expensive for home buyers. However, it is an opportunity for NRIs to invest in real estate in India as the fall in the rupee gives more value to the dollars. This has called for increased real estate enquiries from overseas.

Although it is commonly believed that NRI real estate investment would be beneficial when the rupee slumps, it can only get you to value if you are at the final stage of buying the property and waiting for fund remittance. The NRI real estate purchase process can take a minimum of 2 to 3 months, and there is a chance that the rupee becomes stable during this period. So, in order to take advantage of the current situation, if you are planning to buy a property in India now, it can only be beneficial to you if the rupee continues to fall or remains at a lower level for some time.

Cryptocurrency:

With the rise in popularity of cryptocurrencies, many NRI investors have found a new asset to invest their money in for higher returns. However, cryptocurrencies carry higher risk, and hence one needs to be careful and should not go overboard while taking exposure in cryptos.

In India, due to the high taxes on crypto returns and the stringent guidelines laid down by the Indian government, most NRI crypto investors do not prefer investing in cryptocurrencies through their NRI accounts. As most cryptocurrencies are denominated in USD, the fall in the rupee does not have much impact on the NRI crypto investors.

To Conclude:

The fall in the INR has impacted differently to the NRI investors according to the asset classes they invest in. The NRI investors need to be very careful and consider the interest rate and taxation while choosing the right investment avenues. Also, remember that diversification is the key to mitigating risk during such unpredictable times, and NRI investors are in a better position to diversify their investment portfolio across geographies, provided they meet the criteria defined for the NRI investors.

Warm Regards,
Ketki Jadhav
Content Writer