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For many years, India has been the world’s top recipient of remittances. This means, the Indian diaspora, sends the highest amount of money home of any nationality.
This blog will explore the potential risks involved in holding that title, by looking at the stability of Indian banks & the potential currency and inflation risk of holding savings in Rupee.
The blog will then look at the tax advantages of holding money offshore in a tax-efficient environment by exploring India’s favourable treatment of offshore investment vehicles.
It should be noted, this blog has been written for Indian’s sending money home for investment purposes, rather than general family maintenance.
Foreign remittances to India play a vital role in strengthening the nation’s economy and providing necessities to its people. Holding on to its position as the top remittance-receiving country in the world, India received USD 79 billion in 2019 from Indian expats all over the world.
A significant percentage of the money sent back to India is saved and invested. According to a wealth management firm based in India, most NRIs (non-resident Indians) tend to use a combination of savings accounts, NRE deposits and mutual funds in India.
Remitting money back to India is a popular saving strategy for NRIs. But just how sensible is it to convert currencies such as USD, GBP, AED & EUR into INR?
When judging the strength of a currency for investment purposes, it’s important to outline the impact of historical inflation levels. In India, annual inflation has averaged 7.35% over the past 62 years.
India’s high level of inflation means that those converting money into INR need to make a return of at least 7.35% per annum in order to maintain their level of wealth.
Source: Inflation Tool
Many NRIs send money back to savings accounts in India – we examined the interest rates being offered by the savings accounts at five of the largest banks in India and calculated the gain/loss savers can expect when considering the impact of inflation.
Interest rate offered
Gain/loss based on historical average
|HDFC||HDFC Bank Regular Savings Account||3.00% – 3.50%||Loss – 4.35% – 3.85%|
|ICICI||ICICI Bank Regular Savings Account||3.00% – 3.50%||Loss – 4.35% – 3.85%|
|AXIS||Axis Bank Basic Savings Account||3.50% – 4.00%||Loss – 3.85% – 3.35%|
|Kotak||Kotak Bank Nova Savings Account||3.50% – 4.00%||Loss – 3.85% – 3.35%|
|State Bank of India||SBI Basic Savings Bank Account||2.70%||Loss 4.65%|
All product information was taken from My Loan Care
Savings accounts offer NRIs the ability to remit currency and earn what appears to be a modest level of interest. However, when inflation is introduced into the equation, it becomes clear these products simply serve to lose depositors purchasing power each year.
If 10,000,000 Rupee is left State Bank of India’s – Basic Savings Account for 10 years the amount will grow to 13,052,822 INR.
However, with inflation at 7.35% in order for the money to maintain the same purchasing power, it would have needed to grow to 20,324,528 INR.
This quick calculation demonstrates the speed at which savers will lose purchasing power.
Many NRIs also use fixed deposit accounts in India – we examined the interest rates being offered by the savings accounts at five of the largest banks in India and calculated the gain/loss savers can expect when considering the impact of inflation.
|Bank||Product||Fixed Deposit Rate of Interest||Gain/loss based on historical average|
|HDFC||HDFC Bank Fixed Deposit||2.50% – 5.50%||Relative loss -1.85% – 4.85% per annum|
|ICICI||ICICI Bank Fixed Deposit||2.50% – 5.50%||Relative loss -1.85% – 4.85% per annum|
|AXIS||Axis Bank Fixed Deposit||2.50% – 5.50%||Relative loss -1.85% – 4.85% per annum|
|Kotak||Kotak Bank Fixed Deposit||2.75% – 5.25%||Relative loss – 2.1% -4.6% per annum|
|State Bank of India||SBI Fixed Deposit||2.90% – 5.40%||Relative loss 1.95% – 4.45% per annum|
All product information was taken from My Loan Care
Once again, this extremely popular savings option for NRIs has been shown to be a loss-making strategy despite appearing, on the surface, to be a sensible investment.
With NRIs sending millions back to Indian banks each year it is also important to look at the stability of Indian banks. Lebanese banks historically also benefitted from extremely large remittance payments, which led to a dangerous overdependence. In Lebanon’s case, savers became overdependent on banks which were propped up by continuous inflows of capital.
Savers in India, should apply the same stress tests.
In order to do this we have looked at the ratings of ‘The Big Three’ S&P, Moody’s & Fitch.
Moody’s Changes Outlook On Indian Banks From Stable To Negative
Fitch revises outlook of 9 Indian banks from Stable to Negative
Whilst S&P have recently downgraded AXIS and Bajaj Finance banks below investment grade due to higher risks. S&P put Indian Bank on ‘credit watch’. While State Bank of India, HDFC Bank, ICICI Bank are rated BBB-/Negative by S&P. A report from S&P claimed ‘India’s economy is in deep trouble’.
Moody’s expects a deterioration in banks’ asset quality due to disruption in economic activity from the coronavirus outbreak. It stated banks’ asset quality will deteriorate across the corporate, small and medium enterprises and retail segments, leading to major pressure on profitability and capital.
Moody’s mentioned a sharp decline in economic activity and a rise in unemployment will lead to a deterioration of household and corporate finances, which in turn will result in increases in delinquencies.
What is abundantly clear from the reports coming out ‘The Big Three’, is the outlook of the Indian banking sector negative. This poor health has in part been brought on by Coronavirus, however, the issues appear to be deeper rooted than just stemming from the pandemic.
Over the past two decades, the purchasing power of the Rupee vs the USD – the world’s global benchmark has been worsening. For those sending money back to India, this can appear an attractive prospect, as the exchange rate is boosted. as major currencies can afford greater amounts of Rupee.
In 2003 1 USD = 45 INR
In 2020 1 USD = 75 INR
The long term decline of the Rupee represents a dangerous trend for those holding the majority of their wealth in Rupee based assets.