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!!
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.