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5.2

Benefits Of Rupee Depreciation For NRIs

When US policy makers announced that their monetary stimulus package was likely to be withdrawn gradually, the Rupee began to slide due to an outflow of FII funds. This, coupled with speculation, a high current account and fiscal deficit and falling reserves sent the Rupee-USD exchange rate into a freefall.

While the Rupee continues to test new lows day after day, it’s time for you, as an NRI, to revisit your decisions on investing, spending and borrowing in India.

 

  • Investments in India– The current crisis has opened up an opportunity for investment in both the debt and equity markets in India:
    • Equity – The equity markets have been affected by a colossal withdrawal of funds during the past two months. The Sensex, which touched a high of 20443.62 in May 2013 fell to a low of 17759.59 on 20 August 2013. While the rupee devaluation and outflow of funds is a cause for concern, there are more fundamental and broad-based domestic ‘good news’ factors, such as the adequate monsoon, which have not yet been acknowledged by the stock markets. Once the rupee stabilizes and the markets begin to take note of structural changes and other positive developments in the economy, stock prices will improve. Accordingly, the present offers an opportunity to invest in good quality stocks.
    • Bonds and fixed income instruments – Due to RBI’s monetary tightening measures and as a fall-out of the depreciating rupee, the benchmark (risk-free) 10-year Government bond has been riding at an all time high. In fact, yields across the curve have moved upwards, driving down prices in all categories and tenures of debt instruments. This again provides a chance to enter debt instruments directly or through mutual funds at the bottom. Recovery in this market is only a matter of time.
  • Expenses in India – Inflation, which had started on a downward path, is likely to rise once more since higher interest rates and more expensive imports (in rupee terms) will drive prices upwards. However, in the past, the Government and the RBI have displayed their ability to control inflation through a combination of monetary and structural measures. While it may take some time, the government has already begun working on this aspect of the economy.
  • Borrowing in India – With interest rates at close to peak levels, fresh borrowing in India should ideally be made on floating interest rate. This means that the lender will periodically reset the interest rate at which you borrow to the current market rate. This will benefit you since interest rates will eventually return to pre-crisis (moderate) levels.

s-5.2

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