Whether NRIs should invest in US Dollars (USD) or Indian Rupees (INR) is a complex and important decision. Several factors must be considered, and making the right choice requires careful evaluation. Let’s explore these considerations together.
Understanding Economic Stability and Currency Strength
Before making an investment decision regarding whether to invest in USD or INR, NRIs need to assess the economic stability and currency strength of both the United States and India.
The US Dollar is known for its stability, backed by a strong economy and reliable monetary policies. The dollar is also called world currency as more than 70 per cent of dollar trade exists outside the US.
On the other hand, the INR is more susceptible to fluctuations due to various factors, including domestic economic conditions and global market trends.
Analyzing Inflation And Interest Rates
Inflation rates and interest rate disparities between the US and India play a significant role in investment decisions. India often experiences higher inflation rates than the US, which can affect the purchasing power of the INR over time.
Off late due to COVID, both countries faced heavy inflation and frequent changes in interest rates. “However, higher interest rates in India may offer opportunities for NRIs seeking better investment returns. Higher deposit rates mean more nominal growth and returns on deposits,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.
Mitigating Currency Exchange Risk
It is important to understand that investing in foreign currencies exposes NRIs to currency exchange risk.
“NRIs holding INR-denominated assets face the risk of depreciation if the Indian Rupee weakens against their home currency. Conversely, investing in USD-denominated assets may provide some protection against currency depreciation risks, although exchange rate fluctuations can still impact investment returns,” says Krishna.
The Indian currency has lost five to six per cent annually against the USD as per data from the last 30 years. The MSCI India index delivered 9.5 per cent in rupee terms in the past 10 years but returned just 5.4 per cent in dollar terms.
It means if you are converting dollars to INR, to invest and later reconvert it to INR, the returns must be over this depreciation also. Then only you will make real returns.
Long-Term Plan
Whether NRIs decide to invest in USD or INR would depend a lot on their long-term plans. Normally NRIs fall into three categories – plan to settle abroad, plan to come back, and undecided.
If you plan to settle abroad, you would maintain NRI status, so better to keep money in your country of stay.
Indian markets are good yielding only if the NRI plans to use the money in India, say buy a house or help his or her parents. It is best to keep Indian finances and taxes simple if the intention is not to return.
“If you do not wish to settle abroad, you should keep on sending money to India and investing here. You have local needs hence money should be available in India. Also, after some years your tax status changes, and tax liability will increase. Returns in India will help you bridge this gap,” says Krishna.
The “maybe” category should take a balanced view till their position is clear.
