Long term prognosis for the Indian Rupee is abysmal - time to increase exposure to US dollar denominated assets

The Reserve Bank of India (RBI) clearly fears inflationary pressures in India to the extent that it cut the repo rate only by 25 basis points today disappointing markets. RBI governor is quoted in the Economic Times as saying that "Conditional upon a normal monsoon, agricultural growth could return to trend levels. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps." Persistently high current account deficit, credit growth falling to the lowest growth rate in over a decade, and now the RBI's own admittedly hawkish stance on inflation only add to an abysmal prognosis for the fate of the Indian rupee. Expectations that the Rupee will hit 60 to the US dollar are steadily rising. Government Pollyannas still try to come up with creative explanations to invent a growth story (see video).



As long as the RBI's Liberalised Remittance Scheme is still available to Indian residents, Indian or NRI investors are strongly urged to increase their portfolio exposure to US dollar denominated investments. You only have yourself to blame if your net worth significantly falls due to a sliding Indian rupee.

Does an offshore investment trust make sense for resident Indians or NRIs?

Indian residents and NRIs with children settled outside India have always faced a very difficult dilemma when it comes to estate planning and leaving a legacy for their children. Very often, Indian residents who have worked all their working lives in India have their retirement assets in a Public Provident Fund or similar structures. Besides this, they typically have substantial cash savings in Bank accounts or investments in stock markets along with property all denominated in Indian rupees. Leaving such a legacy for children who are settled outside India and who have no intention of returning back to India only complicates problems for the children who have to sort out this mess and bribe their way through the Indian bureaucracy to claim what is rightfully theirs. You begin paying bribes starting with the death certificate - this phenomenon is quite wide spread throughout India with some crematorium officials in Mumbai asking as much as US$ 1000 in bribes.



These problems can best be avoided by setting up an offshore trust in a UK jurisdiction such as the Isle of Man or the Channel Islands in a hard currency of your choice. RBI now allows every Indian resident to transfer up to US$ 200,000 every calendar year through their Liberalised Remittance Scheme. This is a very effective mechanism for Indian residents to transfer their wealth abroad to leave a legacy for their children. NRIs returning back to India after a lifetime spent working overseas may also wish to leave a legacy for their children using this offshore investment trust mechanism to avoid taxes on transferring wealth to India.

Inflation is the growth killer - and the RBI stifles it further through monetary policy

Last month, the Governor of the RBI, delivered a lecture at the London School of Economics on India's macroeconomic challenges in which he more or less admitted that RBI's monetary policy was largely to blame for declining growth in India. A large portion of the lecture focused on the huge inflation problem in India which as measured by the wholesale price index(WPI) was 9.6% in 2010/11, 8.9% in 2011/12 and 7.5% 2012/13. According to the RBI the major driver from the supply side has been food inflation, arising from rising incomes, especially in rural areas, which is leading to a shift in dietary habits from cereals to protein foods, the monsoon related spike in prices of food items such as vegetables and global commodity prices, especially the price of crude oil. The price of crude especially affects Indian inflation very badly since India imports 80% of its oil demand.



This commodity inflation is further compounded by the depreciation of the rupee and lack of demand adjustment due to the Indian governments subsidized pricing regime of petroleum products. But the worst growth killer of all has been RBI's response in the form of monetary policy as the Governor himself admits in his speech.

Indian Stock Market Main board plunges to 7 month low

As warned in an earlier post, the Indian Stock Market has started its downward journey and reached new 7 month lows today. India also posted a record current account deficit in the October-December quarter causing the Indian rupee to weaken and foreign investors have now sold a net total of $137 million in Indian shares in the four trading sessions to Monday and a net total of $710.68 million in domestic debt over the same period, according to regulatory data.



I have always encouraged the diversification of portfolios away from an Indian equities focused portfolio to a more diversified global exposure. RBI's Liberalised Remittance Scheme in combination with fund houses in the Channel islands and Isle of Man are the right tools to use to achieve this diversification.

India - No more a BRIC in the wall

Dr. Deepak Chopra wrote an opinion piece in the Huffington Post today asking if India is having a crisis of soul. As he points out, India's fall of growth by 5% since 2010 boils down to the millions of individual Indian workers being "actively disengaged" and only about 9% of the population who are actively engaged build new products and services or generate new ideas driving economic growth. As the video clip from CNN's Fareed Zakaria GPS shows, India is further dropping out of favor with FDI (as opposed to portfolio investment) taking new hits and challenging India's status as a BRIC economy.

This again highlights the fact that blind optimism in the performance of Indian market instruments is largely misplaced and I would encourage both NRI as well as resident Indian investors to look for safer shores for their investments. RBI's Liberalised Remittance scheme provides an option for Indian residents to invest overseas. NRIs may use local options to invest in local or overseas investments.

Does it make sense to invest in Indian equities in the medium term?

On Jan. 2nd, 2013 the Bombay Stock Exchange index, the SENSEX started the year on a falsely optimistic note at 19714.24. On Apr. 1st, 2013 It began the second quarter a lot less optimistically closing at 18864.75 (down 4% so far). Live Mint today published a possible explanation for this malaise citing falling car sales, air passenger traffic numbers and disappointing rise in HSBC's Indian PMI numbers. As the article points out, all this negativity comes at a time of double digit inflation and massive current account deficits in India.

This begs the question, does it really make sense to invest in Indian equities in the short to medium term? This is where RBI's Liberalised Remittance scheme allows Indian residents to diversify their investment exposure by allowing investment up to US$ 200,000 each calendar year in overseas investment instruments. Given today's propensity among Indian residents to send children overseas for education or settlement, it makes complete sense to set up a trust or other investment structures in tax free jurisdictions overseas so that investors can take advantage of tax free wealth accumulation.