Riding the rupee roller coaster
UPDATE: At a recent AWC coffee morning, the head of Deutsche Bank’s India operations indicated that the LRS applies to Indian citizens only. They don’t see the scheme as limiting an expat’s ability to send money home to pay bills. If you are interested in talking with someone at Deutsche Bank about expat offerings, please visit their website.
Gather a group of expats around a table lately, and inevitably the conversation will turn to one topic: the rupee. You thought I was going to say the Mumbai Mirror sexpert, didn’t you? Admit it. While the sexpert is entertaining as always, for most expats, the rupee’s recent fall has a far greater impact on our everyday lives and pocket books.
When my husband first arrived in India in January 2012, a US dollar bought about 49 rupees. After moving into the fifties, the rupee has held relatively steady in the 50 to 55 range for most of 2012 and 2013. Then, in May this year, just as many expats were headed out on our monsoon holidays, the rupee started a headlong fall against the US dollar. In truth, the rupee had been falling for some time, but it was more like a gradual roll down a hill with an occasional recovery rather than the steep, vomit-inducing free fall of the last few months. While we were in the US in August, the rupee touched 70, and it looked like the rupee was headed straight off a cliff. The RBI started taking serious measures to slow the decline.
One such measure was to limit the amount that individuals can send out of India to USD 75,000 annually. The previous cap had been USD 200,000. Needless to say, this measure sent a panic through the expat community as most expats send money back to their home countries regularly, and many of us would hit this 75K limit quickly. The news articles made it sound like the limit applied to everyone. The news went out across Facebook. Some people said the rule applied only to resident Indians. Other expats experienced problems at their banks trying to send money out: more forms and restrictions. Finally, after much research, I have located the RBI circulars pertaining to the restriction. Exciting reading, I know.
The restriction put into effect in August pertains to the Liberalized Remittance Scheme (LRS). This scheme, enacted in 2004, is a “step towards further simplification and liberalization of the foreign exchange facilities available to resident individuals.” (RBI FAQ circular 20 Jan 2012) The key part of this statement is “resident individuals.” If you are not a resident individual, this law does not apply to you. Thus, most expats would not be covered under the scheme and should not need to worry about the reduced limit. Moreover, the primary purpose of the scheme is to make it easier for Indians to diversify their investments outside India, thus reducing rupee volatility. The kinds of transactions covered under the scheme include purchasing stocks and other fungible financial products. For the record, you can’t buy lottery tickets with the money or send it to Pakistan. However, sending money to your US or UK account to pay your mortgage should not be an issue. And, like I said, if you are not a resident individual, the scheme does not apply to you in the first place. If you have difficulty at your bank, seek a higher authority.
Editor’s note: After an extended conversation with a friend this weekend, it has become clear that the definition of a “resident individual” is up for interpretation by the banks. Thus, the confusion. I have not been able to locate a clear definition of “resident individual” on the RBI website.
Rocking with Mr. Rajan
Now that we’ve cleared up that question, the next one is how do you decide when to move your money? Well, that’s up to you. Many of us are watching the exchange rate daily. The rupee’s roller coaster ride of ups and downs is being closely reported by the newspapers. The amount of contradictory information about the economy is staggering. The slightest bit of good or bad news about the economy sends the rupee up or down by 30 to 80 paise a day. And, when you are moving money out of India, those paise start to add up. The good news is that after its precipitous decline in August, the rupee seems to be recovering a bit, in part thanks to the appointment of a new RBI governor, Mr. Raghuram Rajan, the Indian equivalent of an economics rockstar.
You didn’t know there were economic rockstars? Of course, there are. But, if the only Indian economist you have ever heard of is Amartya Sen of Harvard, then you are not alone. Raghuram Rajan was educated at IIT-Delhi and received his PhD from MIT in Boston. He is also a professor at the Booth School of Business at the University of Chicago. In 2005, he authored a controversial paper that predicted the 2008 financial crisis. While reviled at the time, his views were later seen as almost clairvoyant. Consequently, his star rose quickly, and he has recently served as chief economic advisor to the Indian government. His appointment as RBI governor was hailed in most quarters, and since his appointment, the Indian financial markets have been hanging on his every word. What does Mr. Rajan have to say about the Indian economy?
In an editorial written before he became governor, but published just after he took office, Mr. Rajan makes the case that people seem to be approaching the Indian economy much like they do cricket matches: manic-depressively supporting or excoriating their teams depending on the win-loss column. He acknowledges serious problems in the economy, but urges caution—and hope. He sees the problems as not structural, but fixable through simple reforms. He argues that part of the current account deficit is a result of gold brought into the Indian market by newly wealthy consumers who were worried about inflation. He argues that if those Indians had invested in Apple stock instead that the deficit would not be as large. Could it be that he would encourage overseas investment by Indians to help balance that deficit?
His most important statement is to remind everyone that the Indian economy is still predicted to grow. Although the predicted 5 percent growth rate is a slowdown compared to larger gains of 7 to 8 percent over the last decade, he emphasizes that infrastructure improvements and upcoming capital projects will help keep the growth steady. He ends his analysis by saying,
Stripping out both the euphoria and the despair from what is said about India—and from what we Indians say about ourselves—will probably bring us closer to the truth.
I encourage everyone to read Mr. Rajan’s article published on www.livemint.com.