Its been almost a year since I wrote anything on SGD INR or for that matter anything else. With the rate hovering around 35 there have been quite a few requests for me to express my views and here is my opinion.
How has the Past Analysis fared?
In my last post (10th May 2010) I had recommended that converting SGD to INR at 33+ mark as it is beneficial based on Interest Rate Parity:
- Interest Rate on secured deposits in India was 8% or more making conversion attractive and
- The expectation was a downward movement from then rate of 32.4 against one SGD to Rs.30 giving additional gains
The first part of analysis held good but the rate moved opposite – towards the Rs. 35 mark.
The instant question that comes to mind is Did I lose if I converted to INR instead of holding SGD’s?
The answer is NO. As per recommendation the pair moved to 33.29 within 2 weeks of recommendation on 21 May 2010. One Dollar coverted to INR @ 33.29 for 1 year and invested @ 8% would grow to 35.95 which is less than todays interbank rate of 35.85
Whats the recommendation for upcoming months?
I am going to stick with my recommendation that converting SGD to INR is beneficial in all situations and one would not loose by repartriating money to India and parking in fixed deposits.
The Interest Rates have strenghthened to 9.5% as of today and conversion has become even more attractive. To substantiate – lets say we convert 1 SGD @ 35.85 now and invest @ 9.5%, it will grow to 39.25 in one years time. Would SGD INR touch 39.25 in one year? Unlikely!!
SGD INR rate is a cross between USD-INR and USD-SGD for which the current rate is 44.25 and 1.235 respectively. For SGD INR to fetch 39.25 in a year the USD-SGD would have to move to 1.13, assuming that there is no change to USD INR.
Consensus on the street is that USD-SGD could move up to 1.19 by October 2011. Even if INR weakens to 46 against the USD the possible rate would be 38.65 after a year which is lesser than what you get by investing in a Fixed Deposit.
How do I decide when is a good time to convert?
Exchange rates do not move linearly and with the volatility its difficult to know if its a good time to convert. Also at the request of few readers I have added the dimension of taxability of interest income @ 30%. The below graph shows the movement of SGD INR for the past 2 years.
Two important observations are:
- SGD INR has stayed below the Tax Adjusted Implied Rate (TAIR) line except 2 occasions
- Its beneficial to convert to INR whenever the actual rate moves away positively from the TAIR.
On 13 Sep 2009 the TAIR was 32.94 and Actual Rate was 33.94, Actual Rate moved back to TAIR of 33.01 on 4 Oct 2009. On 30 Jan 2011 the Actual Rate was 35.81 against the TAIR of 35.49 and the two converged to 35.53 by 6 Feb 2011.
The chart below shows the prediction based on curent exchange rate of 35.85, Interest rate of 8.5% till 30 June 2011 and 9% after that till 31 Dec 2011, tax of 30% and Start of Year Rate of 34.96:
The expectation is that with the Singapore elections on 7 May 2011 the SGD might appreciate quickly towards 1.19 against the USD giving a possible rate of 36.5 in next 2 weeks. If this happens you know what to do!!
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Update – 30 May 2011
The Interbank Rate moved up to 36.55 today – target achieved. There is a slight possibility of the pair flirting with 37 levels but 36.5 is a good rate to convert.
Aditya Ladia 
Hi Nitin,
to consider SGD a safe haven would not be wise. The Singapore economy is exteremely co-related to global trends. MAS has embarked on a strong dollar regime but it is going to hurt them long term – Service sector would move base to other locations (this has already started).
From a logical perspective taking money to India makes sense if thats where your long term plans are.
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Oops there is a typo in the above msg. It should be “The Interbank rate is now 37.30” and not “The Interbank rate is not 37.30”
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Aditya,
The Interbank rate is not 37.30. SGD is a safe haven currency similar to CHF and thats why its rising. INR is a junk. But with crude oil prices coming down, do you think INR will apreciate anytime soon and do you think now is the time to convert SGD to INR.
I have a huge amount ~ 80K SGD to be converted. I want to convert it on a repatriable basis into my NRE account. NRE accounts have a tax free interest of 4%. Do you think SGD vs INR will go up from here more than 3-4% in a years time?
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Hi Pathik,
You can actually enjoy the high interest rates from India as well as be able to repatriate funds back to Singapore.
Here’s what you need to do.
Open a NRE account with ICICI and then open an ICICI Direct Online share and Mutual Funds trading account with ICICI. Make sure you open the ICICI Direct account as an NRI and link it with your NRE account.
Once that is done you can invest in debt mutual funds which give returns similar to FDs and have lower tax implications. Once you sell those mutual funds the funds will be redeemed to your NRE account, which can be repatriated to Singapore easily.
Cheers!
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Hi Pathik,
The debate here is to whether to keep Singapore Dollars targetting a better rate in the future or to repatriate.
If you look at the Tax Adjusted Implied Rate (TAIR, green line on first graph taking tax at 30%), it has been significantly above the SGD INR rate over the past 2 years except a few weeks. So even with the tax consideration the returns are better than what one would get by keeping money in Singapore.
A simple rule of the thumb could be to repartriate whenever the SGD INR current rate crosses the TAIR
Cheers
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Hi Aditya
I don’t think 9.5% return on INR deposit is a reasonable estimate for a NRI. The 9%+ rate is on NRO account which is subject to almost 30% taxation. This reduces the return to almost 6.65%.
Then there is no easy way to repatriate money back from a NRO account which means that if you consider the reference currency as SGD (which according to the post you seem to be), there is no way to get the returns in SGD which you are presuming.
Cheers
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