Its been a couple of months since the Reserve Bank of India (RBI), India’s central bank, permitted residents to remit upto US$ 25,000 every year for any purpose. But the excitement surrounding this development refuses to abate (and rightly so!). In this article, we take a look at, and give our view on, fixed deposits denominated in foreign currencies as an investment option.

First, let’s visit the argument for investing in a fixed deposit (repetitive, but important!). There are primarily two reasons –

• safety of capital (not to say that deposit taking companies always return the money, but if you have done your home work well, this is the norm)
   

• stability of income (same conditions apply here)
   

Because of these two reasons, FDs appeal to the risk averse investor. It also appeals to individuals who have spare amounts awaiting deployment (short term FDs ensure money is not sitting idle).

But what happens if you decide to invest in a FD not in India (in Indian Rupees), but say in Singapore (in another currency)? The risk element associated with this product increases. The risk here stems from the possibility that the currency you are invested in might appreciate (you will gain as on conversion you will get more local currency per unit of the foreign currency you invested in) or depreciate (conversely, you will lose) vis-à-vis your local currency. In other words there is greater uncertainty about both the capital being protected and the interest income remaining stable.

And then there is question of the possibility of interest rates (US$ linked) going up. The answer is apparent from the following statement, which is part of a speech delivered by the Vice Chairman of the Federal Reserve on the 8th of April 2004 - “...we also have to recognize that maintaining the current level of the funds rate for too long will eventually result in an unwelcome increase in inflationary pressures.” In other words, don’t bank on the interest rates remaining low for too long.

Not a very attractive proposition for the typical FD investor to consider going global.

But the option of a foreign currency deposit will appeal to some.

Take for example; your son/daughter is going to the London to purse higher studies. Your expenses in this case will be denominated in Pound sterling, while your income is probably in Indian Rupees. And since the Rupee has been consistently losing value vis-à-vis the Pound sterling, there is a possibility the expenditure may actually exceed expectations (if depreciation continues, or happens at a faster rate, every time you send a Pound sterling draft to your son/daughter you will have to shell out more Rupees for every Pound sterling). In such an instance a Pound sterling based fixed deposit can be of great use. Since you save and spend in Pound sterling, the currency risk is eliminated.

Another reason to consider a foreign currency deposit is to diversify the risk of being invested in only one currency (for most of us that is the Indian Rupee).

And to counter the possibility of rising interest rates, we recommend that you invest in short term FDs.

Attempts to get information on the global FD products launched by the banks were unsuccessful. However, the returns offered are far less than what you will get by making a deposit in any local bank/institution (for example, a three month US$ denominated FD is likely to return you only 1% pa). But the same is worth considering if you have a foreign currency denominated liability or upcoming expenditure.

Need assistance?
At Personalfn and Equitymaster we are taking initiatives to ensure that you are ahead of the curve when it comes to benefiting from this opportunity. Over the last fifteen years we have focused our efforts on empowering you with credible research and investment tools for the domestic markets. We are now ready to assist you in planning your investments in the global markets.

We request you to fill a brief questionnaire. This way we can keep you posted on new investment opportunities that we will make available to our customers in the next few weeks and other regulatory developments that are taking place.

Personalfn will soon be putting up a note which will discuss among other things the economies and currencies that are likely to do well over both the near term and the long term. The contributors to this article will be Sudhir Mulji (economist), Jamal Mecklai (forex expert) and Ajit Dayal (one of India's best known investment advisors).

• Go Global with Your Money!
   
• Go Global in stocks!
   

• Listen to the experts!

  Disclaimer: Foreign Jurisdictions
  Quantum Information Services Ltd (Personalfn) provides Mutual Fund Distribution Services under the brand name "Personalfn"
  At present it provides Service only to any person in any jurisdiction where it may be lawful to offer such a Service. Personalfn is registered with Association of Mutual Funds of India (AMFI) as a Mutual Fund Distributor. Residents of countries other than India, shall use the Service only to the extent the domestic laws of such countries permit them to use the Service
  The Mutual Fund Distribution Services provided by Personalfn are not being offered or specifically made or directly available for use of U.S. Persons -as defined by the Regulations under The Securities Act, 1933 of the United States of America or other Persons in such countries where it is not lawful to provide such service.

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