Aug 8, 2011, 10.57PM IST
The rupee touched a high of Rs 43.95 against the dollar recently. While the dollar was prompt to catch up, economists do not see a stronger dollar as a continuous trend.
Says Manika Prem Singh, promoter of economic research firm Orbis Economics, "While the currency has not been able to maintain its position at sub-44 levels, this recent level should not be seen as a one-off movement in the rupee."
A number of factors tilt the scales in favor of a stronger rupee. "The broad currency trend has been one of appreciation over time; the Reserve Bank's foreign exchange reserves accretion is a possible reflection of the underlying pressures for a rise in the rupee; foreign direct investment (FDI) has improved in 2011-12 so far and policies are finally being cobbled together for allowing FDI in multi-brand retail; and last, the subsisting weakness in the US economy will continue to translate into a stronger rupee, barring any major negative global development," Prem Singh cites.
But an appreciating rupee is definitely not good news for dollar repatriations, that is, money sent to India by NRIs based in the US. We look at various scenarios and try to address how to deal with them
What you should do
Scenario 1: For regular repatriations
Virat Diwanji, Executive Vice President, Kotak Mahindra Bank says, "Major remittance flows into India are for family maintenance, followed by investment into multiple asset classes including real estate. Sustenance remittance has no connect with exchange rates."
What this means is that if you need to send money home on a monthly basis for your family's expenses, there is little you can do about it, because you cannot really time such remittances according to the currency movements.
Scenario 2: For investment driven repatriations
If you are wondering if now is a good time to remit funds to India for investment purposes, Diwanji says, "While markets are volatile and one may see rupee in range of Rs 43- Rs 45, for those looking at investing in India, various long term asset classes including real estate looks attractive. Even NRO deposits have seen significant inflows as interest rates become more attractive. Hence looking at various asset classes and purpose for flows, one can continue to move money to India without looking at volatility. For others who want to hold money in India without investing or converting, they can do so through Foreign Currency Non-Resident (FCNR) deposit route and convert when they see a favorable exchange rate. Any rate north of Rs 45 is a good rate in the current scenario."
Having said that, if your plan is to remit in the near future of 3-6 months, rupee is not likely to rise significantly.
Indranil Pan, Chief Economist of Kotak Mahindra Bank explains, "With capital flows just about covering the current account deficit, scope for any material INR appreciation looks limited. However, we cannot totally rule out bouts of rupee appreciation, especially around times of huge inflows (near IPOs etc). Some dollars could also start coming in due to the deal of Reliance and BP amounting to USD 7 billion that was cleared. All this in a stable global scenario could lead to some appreciation bias for the rupee.
However, we do not consider these as sustainable appreciations." Pan expects USD/INR to remain choppy and trade in the Rs 44.00 - Rs 46.50 range for most part of this financial year.
An economist from a leading financial services firm also agrees. He says, "While the large interest rate differential will be positive for the INR, we fear that the global risk averse environment and its negative impact on equities will cap a large appreciation. Remitting funds now would be better than waiting for the next 3-6 months. However the advantage is not considerable because we do not expect too much INR appreciation in the near-term."
The more significant difference would perhaps arise over the longer term of 1-2 years. "On a longer horizon of 1-2 years, we are more positive on INR and expect it to trade in the range of 42-43.50. We expect the appreciation on the back of more capital inflows reflecting the growth differential between US and India. Given the large appreciation bias, NRIs looking to remit funds in the next 1-2 years, should remit funds now," the economist adds.
Scenario 3: Currency bets?
It might seem tempting in times like these to bet against the dollar to make a quick buck. But California based financial planner and NRI specialist with InvestmentYogi.com Ariadne Horstman cautions, "If you have a US based need for the money in the short term, better keep it in the USA. Betting on currency moves is a big gamble. I might prefer to see people investing in funds which hedge the dollar professionally rather than doing it themselves independently."
Smart options
Option 1: Currency futures
These are contracts devised to hedge risks that arise out of foreign exchange fluctuations. Experts suggest that today, one could sell the USD/INR 6 months forward date or 2 year forward date. This will help the customer hedge against currency appreciation.
To explain with an example, suppose you enter a contract to sell USD 10,000 2 years from now, at an exchange rate of Rs 43. Suppose the rupee appreciates to Rs 42, you would still be able to sell at Rs 43.
Of course, this is a very simple example. You would need to take into account other factors such as costs, counterparty risks and so on. Like Horstman says, "I would only recommend it to seasoned investors who can well afford to take the risk and know the risks. I would not recommend this to the average Joe."
Option 2: Cost effective remittances
What will the average Joe do in times such as these? Keep transaction costs as low as possible. After all, you don't want remittance costs eating into the already depreciating dollar value.
And if you plan ahead, you might have the benefit of time on your side. That is, you may be able to opt for lower cost remittance methods even though they may take a few days longer.
Read this for help on remittance options: Easy options for sending money to India and abroad
Whatever you do, Diwanji says, "It is advisable to look at the purpose of sending money (investment v/s sustenance) and take a decision accordingly. Further, it is also advisable to talk to your banker and seek advice on the quantum of remittance and the timing."
Says Manika Prem Singh, promoter of economic research firm Orbis Economics, "While the currency has not been able to maintain its position at sub-44 levels, this recent level should not be seen as a one-off movement in the rupee."
A number of factors tilt the scales in favor of a stronger rupee. "The broad currency trend has been one of appreciation over time; the Reserve Bank's foreign exchange reserves accretion is a possible reflection of the underlying pressures for a rise in the rupee; foreign direct investment (FDI) has improved in 2011-12 so far and policies are finally being cobbled together for allowing FDI in multi-brand retail; and last, the subsisting weakness in the US economy will continue to translate into a stronger rupee, barring any major negative global development," Prem Singh cites.
But an appreciating rupee is definitely not good news for dollar repatriations, that is, money sent to India by NRIs based in the US. We look at various scenarios and try to address how to deal with them
What you should do
Scenario 1: For regular repatriations
Virat Diwanji, Executive Vice President, Kotak Mahindra Bank says, "Major remittance flows into India are for family maintenance, followed by investment into multiple asset classes including real estate. Sustenance remittance has no connect with exchange rates."
What this means is that if you need to send money home on a monthly basis for your family's expenses, there is little you can do about it, because you cannot really time such remittances according to the currency movements.
Scenario 2: For investment driven repatriations
If you are wondering if now is a good time to remit funds to India for investment purposes, Diwanji says, "While markets are volatile and one may see rupee in range of Rs 43- Rs 45, for those looking at investing in India, various long term asset classes including real estate looks attractive. Even NRO deposits have seen significant inflows as interest rates become more attractive. Hence looking at various asset classes and purpose for flows, one can continue to move money to India without looking at volatility. For others who want to hold money in India without investing or converting, they can do so through Foreign Currency Non-Resident (FCNR) deposit route and convert when they see a favorable exchange rate. Any rate north of Rs 45 is a good rate in the current scenario."
Having said that, if your plan is to remit in the near future of 3-6 months, rupee is not likely to rise significantly.
Indranil Pan, Chief Economist of Kotak Mahindra Bank explains, "With capital flows just about covering the current account deficit, scope for any material INR appreciation looks limited. However, we cannot totally rule out bouts of rupee appreciation, especially around times of huge inflows (near IPOs etc). Some dollars could also start coming in due to the deal of Reliance and BP amounting to USD 7 billion that was cleared. All this in a stable global scenario could lead to some appreciation bias for the rupee.
However, we do not consider these as sustainable appreciations." Pan expects USD/INR to remain choppy and trade in the Rs 44.00 - Rs 46.50 range for most part of this financial year.
An economist from a leading financial services firm also agrees. He says, "While the large interest rate differential will be positive for the INR, we fear that the global risk averse environment and its negative impact on equities will cap a large appreciation. Remitting funds now would be better than waiting for the next 3-6 months. However the advantage is not considerable because we do not expect too much INR appreciation in the near-term."
The more significant difference would perhaps arise over the longer term of 1-2 years. "On a longer horizon of 1-2 years, we are more positive on INR and expect it to trade in the range of 42-43.50. We expect the appreciation on the back of more capital inflows reflecting the growth differential between US and India. Given the large appreciation bias, NRIs looking to remit funds in the next 1-2 years, should remit funds now," the economist adds.
Scenario 3: Currency bets?
It might seem tempting in times like these to bet against the dollar to make a quick buck. But California based financial planner and NRI specialist with InvestmentYogi.com Ariadne Horstman cautions, "If you have a US based need for the money in the short term, better keep it in the USA. Betting on currency moves is a big gamble. I might prefer to see people investing in funds which hedge the dollar professionally rather than doing it themselves independently."
Smart options
Option 1: Currency futures
These are contracts devised to hedge risks that arise out of foreign exchange fluctuations. Experts suggest that today, one could sell the USD/INR 6 months forward date or 2 year forward date. This will help the customer hedge against currency appreciation.
To explain with an example, suppose you enter a contract to sell USD 10,000 2 years from now, at an exchange rate of Rs 43. Suppose the rupee appreciates to Rs 42, you would still be able to sell at Rs 43.
Of course, this is a very simple example. You would need to take into account other factors such as costs, counterparty risks and so on. Like Horstman says, "I would only recommend it to seasoned investors who can well afford to take the risk and know the risks. I would not recommend this to the average Joe."
Option 2: Cost effective remittances
What will the average Joe do in times such as these? Keep transaction costs as low as possible. After all, you don't want remittance costs eating into the already depreciating dollar value.
And if you plan ahead, you might have the benefit of time on your side. That is, you may be able to opt for lower cost remittance methods even though they may take a few days longer.
Read this for help on remittance options: Easy options for sending money to India and abroad
Whatever you do, Diwanji says, "It is advisable to look at the purpose of sending money (investment v/s sustenance) and take a decision accordingly. Further, it is also advisable to talk to your banker and seek advice on the quantum of remittance and the timing."
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