Economy

The great NRI dilemma — rupee or dollar?

Illustration: Deepak Harichandan

Illustration: Deepak Harichandan  

Every NRI has surely been troubled by this question: should I invest in India or should I not? A complex cocktail of emotions ranging from love for their motherland and a sense of guilt for not giving back to it combine with personal choices to often lead to a wrong answer to the question above.

So, what’s the deal like?

NRIs typically fall into three broad categories: one, those who are abroad on an assignment and will come back.

Two, those who are settled abroad and do not plan to come back. Three, those who are abroad, have no immediate plans to come back but ‘may’ decide to come back at some point. This last category is the problem one and accounts for the majority, unfortunately.

Planning to return

This category of NRIs either have their families in India or plan to return to India with their families, have income and expenses in rupees and remit money into India regularly.

For these NRIs, investing in their home country for their goals and objectives is logical. However, I have trouble with their following habits:

First, while they obsess over currency conversion, they fail to do the ‘mental accounting’ of segregating for aspirations like education, wedding or retirement. For example, many of the NRIs let their child continue education abroad. In this case, they would have been better off holding and investing in dollar-denominated (or foreign currency) assets to help them with such an expense. A proper goal-planning exercise will help them decide on where to invest in. Second, their obsession for real estate. This craze has partly come down in the last few years as the real estate sector was down, and rental yields went even below 2.5% and NRIs struggled to even find tenants for their properties.

Third, some NRIs who have held only NRE deposits all their life, retire, come back and then, entirely shift to high risk products like PMS, AIFs equity funds or stocks. They do this since NRE deposits lose their tax-free status once they become residents.

Here, special mention must be made about NRIs from the Gulf as opposed to those from the West. Having paid little or no tax in India (NRE deposits) or the Gulf almost all their lives, their only overriding criteria is about investing where the tax is less. But assuming risks suddenly, especially, post retirement, can leave them in trouble unless they have other sources of income

Settled abroad

These NRIs are permanently employed abroad (say U.S./Canada/U.K./Australia) and settled there with their families and do not plan to come back to India. In this case, typically, they may have their aged parents or siblings in India. Other than that, there is little at stake locally. Their key goals — whether to buy a house or educate their children — will all transpire in their residing country.

What is their motivation to invest in India? If it is to provide some income for their parents or relatives, then investing in NRE deposits, having an NRE account and providing power of attorney (PA) for somebody locally to withdraw the money for their needs is a simple and an efficient way to achieve this. Since NRE deposits and savings accounts are tax free, it is easy from a taxation perspective.

If the NRI’s intention is to keep money locally to serve local needs, this should suffice.

Investing in property or other assets and the hassle of repatriating it later and losing on rupee depreciation are all avoidable. Participate in the Indian markets but know this:

The MSCI India index delivered 9.5% in rupee terms in the past 10 years but returned just 5.4% in dollar terms. Indian markets are great only if the NRI plans to use the money in India. It is best to keep Indian finances and taxes simple if the intention is not to return.

The ‘maybe’ category

I wish to tell them this: if you never had a clear idea or desire to come back to India, you probably will not! Do not ‘concretise’ your investments in India, if you do not have concrete plans to come back.

This category of investors should invest assuming they are settled abroad. They can look at dollar-denominated options to invest even if they are not in the U.S. Please remember, the long-term depreciation of the rupee against the dollar is 4-5% annually. Even if they decide to eventually come back, they would have earned 4-5% by simply holding in dollars instead of the rupee.

(The author is head, MF Research, FundsIndia.com)

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Printable version | Aug 10, 2020 12:20:53 AM | https://www.thehindu.com/business/Economy/the-great-nri-dilemma-rupee-or-dollar/article27401695.ece

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