NRIs (Non-Resident Indians) from the UAE are constantly on the lookout for investment opportunities . One of the most sought-after destinations for their investment has been India; partially for financial reasons but predominantly because most of them intend to retire back home in India.
However, if an NRI is required to pay for his / her child’s higher education in the United States, or if the NRI can migrate to another country; would he / she then transfer the funds from INR to USD or any other currency at that stage? Does that make economic sense?
India continues to retain its position as the top country to receive remittances which total to $80 billion, of which a substantial 27% was contributed by expats based in the UAE.
While there are enough reasons to remit money to India, there is a need to step back and assess whether the UAE based NRIs optimize their benefits from investing in Indian rupee or Rupee denominated instruments. Some of the evidence gathered below seem to indicate clearly that investing in US Dollars or US Dollar denominated investment have offered better returns in the past.
Impact on value generation
A comparison on how the $100,000 would have fared in Nifty Index (^NIFTY on Indian bourses) and Dow Jones Industrial Average (^DJI on US bourses) is given below –
* USD 100,000 converted to INR as of Jul 2009; **USD value as of Jul 2019 converted to INR
From the above table, it is evident that investing in ^NIFTY in INR has led to lower value creation compared to investing in ^DJI in US Dollars. For an investor who intends to use the funds for a long-term financial goal, it is advisable to stay invested in USD markets and remit the required funds to India at the time of need.
Illustrations for investment value of USD 100,000 –
From the above table, the following facts can be gathered –
· Investment in ^DJI has 11.5% p.a returns over a 10-year period
· Investment in ^NIFTY has provided 9.6% p.a returns for 10-year period
· The amount repatriated in INR after 10 years has also benefited due to favorable currency fluctuations
Impact of currency fluctuation
Source: Yahoo Finance (data)
Even though the Indian indices will have higher volatility as suggested by the above graph, we can see that returns can be similar in the long run.
If we take the above assumption into consideration and in a hypothetical scenario assume a growth rate of 8% per annum for both markets, we can see the following:
The difference in value amounts to a whopping INR 4,737,224.61 which can be attributed to the gains from currency (USD to INR) appreciation. This is indicative of the fact that INR has constantly depreciated against USD over the past decade. Hence, an investor remitting and investing in INR has lost significant opportunity for Value Creation.
While there is clear evidence to suggest that the INR has depreciated against the USD over the years, this by no way means the trend will continue forever. However, it does highlight the fact that over the long haul, investing in dollar assets has enabled higher value creation. If the NRI’s income is in Dollars or a currency pegged to the Dollar, it would be advisable to make a conscious effort to look at Dollar based products for building a meaningful investment portfolio. There are enough products in USD which expose the investor to different asset classes, markets etc. It is only appropriate to take advantage of the opportunity while one can!