181210 sensex
Higher import bills are fuelling some of the price rises India's economy is facing. And these concerns are amply reflected in the stock markets too. Image Credit: Bloomberg

Dubai: Inflationary rises in the Indian economy is starting hurt consumers and investors - with NRIs facing uncertain returns on their savings and investments there.

NRIs with expenses in India such as home maintenance, upkeep of the family, children’s education and parents’ medical bills are experiencing higher costs as a result of rising prices.

Official data show India's retail inflation rate, measured by the consumer price index (CPI), at a 17-month high of 6.95 per cent in March, far above the Reserve Bank of India's medium-term target of 4 per cent for a 30th consecutive month.

The biggest drivers of India’s inflation were food items. Of the top five sub-groups with the highest month-on-month increase in Index, four were food-related - oils and fats, meat and fish, fruits, and spices.

Currency gains

NRIs in general are better off than their Indian resident counterparts in facing the purchasing power impact of inflation, thanks to the exchange rate depreciation of the rupee against all leading hard currencies. Currency depreciation mean a significant portion of the drop in purchasing power of NRIs in India is compensated through higher amounts of rupee their hard currency earnings fetch.

For example, the rupee has depreciated more than 2 per cent against the dollar in the last one year, which is correspondingly reflected in the UAE’s dirham’s exchange rate to the rupee.

6.95%


India's retail inflation rate, which is a 17-month high

Impact on rupee savings

Bu the impact on their savings and investments are a different story. Inflation is likely to create money illusion through a rise in the nominal values of assets such as houses, land and other income sources in India. However, the decline in purchasing power of rupee would mean the real gains (nominal gains minus inflation) would be negative.

NRIs usually accumulate personal savings in India through their non-resident bank savings, fixed deposits or corporate fixed deposit schemes. Under the current low interest environment, rates on most of these fixed deposit schemes are 4.5-6 per cent. With the current inflation rate hovering around 7 per cent, these fixed deposit schemes are yielding negative.

“With the inflation outlook pointing to further decline in the purchasing power and exchange rate of rupee, NRIs should diversify their savings and investments from purely rupee denominated asset classes,” said Krishnan Ramachandran, CEO of Barjeel Geojit Financial Services.

Foreign currency deposits

Foreign currency non-resident (FCNR) deposits are relatively low yielding compared to rupee deposits in nominal terms. As the inflation rises, these deposits in hard currencies hedge the real value and interest income from inflation to a great extent.

“Rates offered on FCNR deposits are likely to pick up in the coming months,” said G.S Gopakumar, an investment consultant. “Until a clear trend emerges for the rupee and Indian stocks, FCNR will be a clear option.”

FCNR schemes allow NRIs and Person of Indian Origin (PIO) to open a term deposit account (for terms not less than one year and not more than five years) in India in any permitted foreign currency that is freely convertible. Many Indian banks have hiked interest rates on FCNR upwards and - with the rising global interest rates - FCNR yields are set to rise.

Gold ETFs, like FCNR deposits, are a clear option for NRIs to park their funds. Dollar-denominated ETFs are recommended in the context of a further decline in rupee against major currencies

- Krishnan Ramachandran of Barjeel Geojit Financial Services

Double-whammy

Indian stock indices have witnessed huge volatility. The markets declined in the last three trading sessions and the trend continued early Monday, with Sensex tanking more than 1,000 points. “The Indian market is likely to remain highly volatile on account of inflation driven by commodity prices, conflict in Ukraine, continuing cheap money policy of the RBI and the worsening fiscal deficit situation,” said Ramachandran. “Long term, for investors it is an opportunity to add fundamentally strong stocks to their portfolios.”

Year-to-date, the Sensex has fallen more than 3.5 per cent. Rising yields on hard currency assets are driving foreign investors to pull out of Indian markets.

While the tanking markets have hit hard the equity and mutual fund portfolios of NRIs, rising inflation has shaved off substantial value. “Inflationary pressures have been weighing on markets too given the possible impact on margins and thus earnings,” said Hemant Kanawala, Head - Equity, Kotak Mahindra Life Insurance.