Interest Rate arbitrage for NRIs
For the uninitiated, NRI is a Non Resident Indian.
There is your dollar, sitting in
- checking accounts with no interest,
- savings accounts earning less than 1%, or
- money market / high yield savings accounts earning around 5%.
As you track the consistent fall in the greenback’s value and wonder whether something can be done, look no further than the home country.
The simple math: Savings accounts in the US are currently yielding around 5% annually. In India, you can get 6.5% for the same money.
Consider this scenario - you want to buy a home and would like to save around 10 lakhs in two years. If you send the money to your recurring deposit account in an Indian bank @ 1000 dollars a month, you will have 996,688 rupees after year 2. Holding the amount in dollars will net you 26,290. At the current exchange rate of 39$, you will fall short by 15000 rupees.
Of course, this assumes that the exchange rate will stay closer to 40.
Here’s a probably stupid and I hope to be proved wrong prediction: I think the rate will go down all the way to 35 Rs for each dollar. This would mean converting at the end of year 2 leaves you with a shortfall of 115,181 rupees.
My 2 cents - if you plan to use the money in India within the next 2 years, it is better to have your savings in rupees.
