With the Indian rupee approaching 60 to a dollar, the question is whether this is an ideal time to repatriate some of your dollars and take advantage of the all time low in the value of the rupee vis-a-vis the US dollar. Well, as it is with everything to do with money, it depends.
But why is the Indian rupee weakening so fast in the first place? Several reasons…
India imports almost all of the oil and that would not be that big a deal in and of itself if consumers were paying market price for this commodity. But that is not the case. Oil is heavily subsidized by the Indian government mostly for political reasons. Subsidizing a commodity whose demand is exploding…now that is a recipe for disaster. And then there is this country’s infatuation with gold with almost 100% of it imported. This along with oil accounts for almost 80% of the country’s trade deficit. This hole ideally could get plugged with capital flowing back into the country if India were an attractive investment destination. But unfortunately that is not the case due to rampant corruption and inefficiencies in the system. And with the Indian economy slowing down, it will be difficult for the country to attract foreign capital without keeping interest rates high, putting the country in a very tough economic spot.
The 30% decline in gold price over the past few months from an all time high could help the situation but you never know. This decline could be met with increased demand from Indian savers as is evident from the recent trade deficit data.
At about the same time, the US Federal Reserve is already hinting at starting to tighten its monetary policy. This will add to capital flight from emerging market economies back to US likely increasing the rupee versus dollar differential.
There are only two reasons to convert your dollars to rupees at this stage.
Reason # 1: If your extended family in India relies on your income for financial support. In that case, you basically have no choice.
Reason # 2: If the intent is to invest in the Indian capital markets, especially the equity markets. Equity valuations in India in aggregate are starting to look very attractive if you have the right investment time-frame (5+ years). And to global Indian corporations, the exchange rate fluctuation is likely a non-issue as they can export their way out of the currency devaluation. By investing in Indian equities, not only can you help yourself but in doing so, help the country plug back some of its gigantic current account deficit.
But if Indian equity markets are not the place where your rupees will end up, stay the hell away.
And don’t even think about investing in Indian real estate. That is next in line to crash.
But why convert your dollars to invest in India. You can invest in India right here from the good old USA. And why only India. Own an entire basket of developing economies. This will not only lower portfolio volatility but also help soften the impact of the risks associated with single country exposure.