Make hay while sun shines – Benefits of rupee devaluation for NRI
Not with standing the fact that exporters and Non-Resident Indians are the most benefited from the rupee devaluation, many NRIs are reluctant to leverage on this opportunity mainly due to misconceived RBI rules and process in the transaction.
Before May 2012, transfer of funds from Non-Resident Ordinary (NRO) account to Non-Resident External (NRE) account was barred. Later on 7.5.2012 RBI allowed transfer of funds from NRO to NRE account within the limit of $1 million per financial year subject to payment of applicable taxes. And also source of funds in NRO account should be transferable or repatriable. However, transfer from NRE to NRO/FCNR/ or resident savings account is allowed.
NRE account is an INR account where deposit can be made in foreign currency and are fully repatriable. Withdrawal is allowed in INR in NRE account. All overseas earnings are deposited into this account and it is fully repatriable without any restrictions.
Whereas NRO account is opened to deposit all earnings that accrues in India such as rental income, dividend, interest etc. Repatriation is restricted to a ceiling of $1 million per financial year, subject to payable of applicable taxes. In NRO account both deposit and withdrawal can be made in INR. As both deposit and withdrawal are allowed to be made in INR in NRO account, exchange fluctuation risk can be mitigated.
Interest earned in NRE account and balance of NRE account are tax free whereas, interest earned on NRO account is subject to tax according to the holder’s tax bracket. In December 2011 RBI exempted interest rate on NRE deposits due to rupee devaluation. This enabled NRI investors to benefit from the devaluation by investing more money in India.
So now too, investors can park their money in NRI account in India for the following reasons:
Experts expect at least two instances of interest rate hike in the current fiscal. Currently interest rate ranges between 6% to 7% for bank deposits. But corporate bonds coupon rates are between 8.5% to 9.5%. In the light of prospect of hike in interest rate, investment in bonds and debt mutual funds are likely to yield good returns for the investors.
Other lucrative option is to invest in equity market either directly or through equity mutual funds.
- Direct investment in secondary market
Though some are wary of investing in equity at current peak levels of Nifty and Sensex, some large cap and most of good quality mid-cap and small cap stocks are still available at reasonable prices for investment. This opens an opportunity to NRIs who had missed the recent rally to invest with much better bargain especially due to depreciation of Rupee. The remittance made at low rupee value now will enable NRIs to invest more money in Indian equities in terms of INR against the less dollars remitted to India.
Now it is the right time to start investing in mutual funds to ride the growth in the economy and benefit from the huge scale of mutual fund industry. Moreover the re-categorization of mutual fund schemes as per recent SEBI guidelines is helpful for investors to select a fund for investment.
For Non-Resident Indians, rupee devaluation has come as shot in the arm with double dhamaka. Thus, NRIs can now reap the benefits by investing money in India at current juncture by way of
- Earning more INR against US dollar deposit into NRE or NRO account as weakening rupee means more value for every dollar remitted into India.
- Non-taxable interest income from bank deposits
- Higher interest income than bank deposits through investments in debt mutual funds and other debt instruments such as bonds.
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