This one is the generic story of an average NRI. In 2008 I came to Dubai and didn’t quite understand the market, business and the country. I felt alone and wasn’t even sure I was in the right job. All I knew was” Mera Bharat Mahan” (India is a great country) where I can return safely and settle down to my sprawling 800 sqft luxury flat only to realise that my family can’t fit into it anymore.
And like any other new NRI I paid regular visits to exchange houses (there are plenty of them in UAE) to remit funds to my Indian bank accounts to book fixed deposits. After all, the first 1 crore is so important. I am sure fellow NRIs from America, Europe, Middle East & Singapore have had similar stories in their early days.
I believe Indians and all other expats do the same before they realize it is too late.
Alas, no regret. But if you are an exception, hats off to you! Anyways let’s focus on what message I have for the average NRI.
In 2011, AED 1 averaged to INR 12 while fixed deposits rates were a handsome 9% in India and 1% in Dubai . For a novice investor it is an arbitrage of 8% per annum that was guaranteed.
I finally achieved my 1 crore milestone in 2015 only to realise that I have once again become a fool since INR dropped to an average price of 17.
Flats have similar stories to tell. Anyone of us who purchased an apartment in Mumbai or Pune in 2011 would have fetched a 100% return on it but by now they lost 50% in INR devaluation.
I do not condone buying Dubai properties nor advise to keep your money in dollars. All I am saying is by converting our money in a higher interest rate currency we are not going to become rich. Let me explain with a simple example of gold.
Consider an investor who decided to buy gold in 2011 worth $1 Mio. Another investor also wishes to purchase gold worth the same amount but first remits their dollars to their native country and buys it in their local currency. Both have an investment horizon of 10 years.
After 10 years would the value of their gold be similar?
If your answer is an obvious yes then how come changing the country will change our fixed deposit or property returns!!
They will not. You can do the math. What we need to be aware of is that returns are risk adjusted.
We all know land appreciates more than flats but have you ever thought why?
And do you know why an average investor like me(not now) is stuck with flats? It is because he/she does not understand what they’re doing.
I frequently get this statement from investors, “I promised my father that I will never invest in the stock market again.”
I am sure if our grandfather would have seen us watching Netflix erotica he/she would have thrown the television set out of our house. Yet we all have it and deep in our subconscious mind it stays like the snake of Kaliyuga. And the moment a new series is available many of us binge watch it in one night.
Let’s get back to investing. I have explained about risk in my earlier post.
What’s the reason?
My layman theory goes this way. One needs to understand that when we remit money to developing economies, they remit back this money in dollars using reserve currency.
Consider the example of Brazil, India, and China for the last 10 years.
Let’s do the math. If you would have invested in an FD in $ in 2011 and compounded that over the next 10 years, you would have made roughly $9 on a $100 investment. On the other hand, you would have lost $21 over a 10 year period in Brazil and made roughly $39 and $19 in India and China respectively.
These figures look bigger. However it is merely 2.5% and 1% CAGR which can be achieved by opting for a bank which can provide higher interest in USD. In all these scenarios, investors fail to beat inflation. For more details refer to Appendix 1.
One must account for the losses, the effects of taxation and transaction charges.
If you are a Sharia compliant investor and you have just converted your dollar to park it in your bank, you too would have lost money due to inflation.
Further, investors need to understand why a particular country’s bank is offering certain percentage guaranteed returns. Like why Usa’s 1-2% returns versus India’s 5-6%. Refer to my earlier article on risk.
There is a saying in the tech world that software is eating the world but currently inflation is devouring the world.
In conclusion some investors got more money in hand by converting and investing in the domestic market with similar asset classes and some like Brazil lost their dollar savings. But overall everyone lost against inflation. So one should only send the money to his/her home country which is needed for the local expenses. Overall investing currency is less important than the returns generated per unit of risk taken by the investor.
No wonder multinational companies invest across emerging markets and generate double digit dollar returns for their shareholders.
I leave you with food for thought that beating inflation should be the real target of our savings.
Appendix:
| Brazil | China | India | USA | ||||
| Interest Rate | BRL/USD | CNY/USD | INR/USD | ||||
2012 | 7.90% | 0.488 | 3.00% | 0.161 | 8.75% | 0.018 | 0.80% |
2013 | 7.80% | 0.423 | 3.00% | 0.165 | 8.80% | 0.016 | 0.79% |
2014 | 10% | 0.376 | 2.80% | 0.161 | 8.60% | 0.016 | 0.87% |
2015 | 12.60% | 0.252 | 1.50% | 0.154 | 7.20% | 0.015 | 0.84% |
2016 | 12.40% | 0.307 | 1.50% | 0.144 | 6.75% | 0.015 | 0.89% |
2017 | 8.50% | 0.302 | 1.50% | 0.154 | 6.50% | 0.016 | 1.14% |
2018 | 6.90% | 0.258 | 1.50% | 0.145 | 6.75% | 0.014 | 1.48% |
2019 | 5.40% | 0.249 | 1.50% | 0.144 | 6.10% | 0.014 | 0.69% |
2020 | 2.20% | 0.193 | 1.50% | 0.153 | 5.40% | 0.014 | 0.32% |
2021 | 4.30% | 0.179 | 1.50% | 0.157 | 5.10% | 0.013 | 0.36% |
Return in Domestic Currency | 211.02% | 121.04% | 196.48% | 108.48% | |||
Return in USD | -22.41% | 21.04% | 41.91% | ||||
| Alpha (10Y CAGR) | -3.30% | 1.10% | 2.72% |
Reference Sources:
https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20469
https://data.worldbank.org/indicator/FR.INR.DPST?end=2021&locations=BR&start=2010&view=chart
https://www.bankrate.com/banking/cds/historical-cd-interest-rates/
https://www.investing.com/currencies/
Thank you for reading.
Bhuvan Gupta
huvan Gupta Follow Bhuvan Gupta on:
June 29, 2022
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2 Responses
Can you be more specific about the content of your article? After reading it, I still have some doubts. Hope you can help me.
A motivating discussion is worth comment. I think that you need to publish more about this issue, it might not be a taboo subject but usually folks don’t talk about these issues. To the next! Many thanks!