Why the Indian rupee slide is hurting some NRIs in UAE

Dubai - Expats who had invested money in leveraged Indian rupee deposit schemes are suffering.

For an ordinary non-resident Indian (NRI), the steep fall of the rupee is certainly a windfall as he gains more on every dirham transferred to India or invested in the home country in the local currency.

The flip side, however, is that for NRIs who had deposited their earlier remittances in an NRE or non-resident ordinary account, the recent plunge in the rupee value would be a heavy blow. They stand to lose heavily in case they opt to transfer their deposits back in dirhams or dollars.

The biggest brunt, however, is being taken by those NRIs who had invested their money in leveraged Indian rupee deposit schemes offered by some banks in the Gulf.

Since the start of the year, when the rupee was trading at 17.34 per dirham, an NRI remitter as of today stands to gain more than two rupees for one dirham.

A leveraged Indian rupee deposit plan usually requires a minimum investment of $150,000 of client contribution and banks leverage this amount five to six times by creating a loan agreement with the customer at a fixed rate of interest for a tenure of 390 to 400 days.

This amount is then remitted to India at the prevailing exchange rate to open a tax-free NRE fixed deposit in the client's name.

Banks further provide a hedge against the currency risk up to a certain level - for example say 72 rupee per dollar or 19.61 per dirham - at an additional cost payable by the customers. If the rupee depreciates up to this amount on maturity, the options pay off the loss incurred by the investor, thereby insuring the investor against the currency risk up to a certain limit.

Since the rupee has steadily fallen by about 10 per cent throughout 2018, after starting the year at 63.67 per dollar or 17.34 per dirham, breaching the hedged level during the tenure of the investment or on the date of maturity of the investment, the loss of the entire notional amount (client contribution + plus bank leverage) is borne by the investor and deducted from his equity by the bank.

In sum, while investors in leveraged rupee deposits lose approximately a 70 to 90 per cent on equity invested (depending on the applicable rate of exchange on NRE deposit maturity) when the funds are exchanged back into dollar and brought back to the UAE, banks earn a profit in terms of an upfront fee of 1 to 1.5 per cent on the dollar/dirham value of funds remitted to India. On top of that, banks earn an interest on the leverage that they provide the customer through the tenure of the investment.

The bank marks a lien towards the NRE fixed deposit as collateral to their dollar/dirham loan to secure themselves. Therefore, as the rupee falls, the value of this rupee collateral in dollar/dirham terms also falls. The banks then trigger a 'margin call' towards investors to inject more capital that would be blocked by the bank as additional collateral to safeguard the bank loan.

According to informed sources, hundreds of NRIs in the Gulf have become hapless victims of the leveraged rupee deposit scheme and suffered huge financial setback in the wake of the relentless rupee tailspin.

In India, the fast-eroding rupee is creating inflationary pressure in the economy by making imports costlier. The industries that use imported components will witness a surge in their raw material cost and some of them will pass on the increased cost to consumers, including families of NRIs in form of higher prices, partially offsetting the gains on remittances.

The rupee weakness is also affecting foreign institutional investor inflows. The rupee weakness will increase the cost of holding debt for foreign investors and could lead to outflows from debt.

On the positive side, the depreciating rupee can be good for export-focused companies. Hence, net exporters like information technology and pharmaceutical companies with a large exposure to the US stand to benefit the most.

According to Kotak Securities Ltd, signs of a sustainable recovery in the rupee versus the dollar remain fragile.

Analysts are of the view that if oil refuses to fall, and with emerging markets looking very brittle along with an escalating trade-war rhetoric, the template is looking negative for the rupee.

They believe a slowdown in flows to local bonds and equity and the political uncertainty ahead of next year's general elections will also weigh on the currency, said Anindya Banerjee, a currency analyst at Kotak, who expects the rupee to reach 73 per dollar by end of December.

Moody's Investors Service last week said India, the world's fastest-growing oil user, risks missing budget targets because of higher energy costs. While high oil prices stoke inflation, a spike also weakens the rupee, which causes foreigners to sell Indian assets.

India's current account deficit (CAD) is vulnerable to rise in crude oil prices as the country imports around 85 per cent of its oil requirements. Rising global oil prices, when coupled with a sharp depreciation in the rupee, creates a double blow for the CAD as the country's import bill spikes even though the volume of import may remain the same.

- issacjohn@khaleejtimes.com