Category Archives: Finance

Finance, Forex, Investment, SGD INR

Why Timing is So Important

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While it maybe difficult to time any market timing does play an important role and could be the difference between ordinary and stellar returns.

Timing of transferring money to India and investing in NRE Deposits or any other investment vehicle could also mean the difference between a 3% compounded return vs returns of 7% or more.

To illustrate this, I took the money transfers I have done over the past few years and tabulated a return table. I factored in cost of transferring funds i.e. nett money received in India and also the cost of repatriating the money back on maturity and using today’s exchange rate

As you would see the return ranges from anywhere between 3% to 8%, even for transfers which were done not too far apart.

The best returns were achieved when the SGD INR rate was well beyond what fundamentals commanded – like in 2018 the fair value of SGD INR was around 52 and a transfer made at 53.3 generated a superior return

If the exchange rate moved favorably or stayed flat the returns went up. Return matrix using exchange rate of 54

Based on long term interest rate parity, i believe 54.5 -55 is fair value for SGD INR towards the end of 2020. So if the pair crosses 55 and banks are still offering 6% or more NRE FD’s then it would be a good investment to consider.

I would be keen to hear what your experience with generating stable returns in India has been

Finance, Investment, Remittances, SGD INR

USD-INR @ 72.5, SGD-INR @ 52.50, what is a better investment FCNR or NRE?

9 Comments

Travelling from Busan to Seoul on a train gives ample time to think about the question many of you have asked – Is it worthwhile to invest in FCNR deposits?

Instead of looking at purely FCNR deposits I decided to do a comparison between FCNR deposits and the good old NRE deposit.

The analysis did become a little tricky as the SGD FCNR deposits have ridiculously low-interest rates and there is no SGD INR forward cover that is readily available in the market and I had to use USD for comparisons.

First of all, lets look at the NRE and FCNR deposit rates on offer in the market for a one year period.

NRE FCNR rates
NRE and FCNR Interest rates as on 11 Sep 2018

Using the best available rates for both NRE Fixed deposit and FCNR deposits we have the below payoff for a one year maturity and expected USD INR rates.

Depositing money in USD deposits in Singapore

This is probably the worst of all the options. The best possible rate for USD deposits in Singapore is 2% and banks charge anywhere between 0.5% to 0.7% to convert SGD to USD and back from USD to SGD. Though one would often see the advert say that there are no charges but the cost is built-in the exchange rate. With the cost of converting money the yield turns out to be mere 0.5%. So unless you are expecting a massive Singapore dollar weakness against the USD this option is best avoided. It is better to keep your money in BOC Smart saver account for better yields.

Investing in USD FCNR with a one year forward cover

The costs involved here are 0.7% to convert SGD to USD, cable charges of atleast 30S$ to transfer money to FCNR account, cost of a forward cover in terms of margin money and brokerage and finally the cost of converting USD back to INR or to SGD and remitting back to Singapore.

With all the associated costs, this option would work if you expect the INR to strengthen back and want to lock the exchange rate at current forward rate of 75. Here the interest on FCNR deposit is tax free but the gains or losses on the forward cover will attract taxes and on the pay off matrix it is not a great option.

Investing in NRE FD

The cost here is simply one time money of 0.5% to transfer money to NRE account and cost to transfer money back if one so desires.

This option gives the stable returns without any complicated transaction setup.

Investing in USD FCNR deposit without a forward cover

The costs here, as in option 2 above, are 0.7% to convert SGD to USD, cable charges of $30 to transfer money to FCNR account and the cost of converting USD back to INR or to SGD and remitting back to Singapore.

Depending upon one’s outlook for USD INR this option can give good returns. If Usd INR crosses 76 over the next year then this option gives better returns than NRE FD but if INR strengthens then one might lose any gains made from interest income.

FCNR NRE Pay off
FCNR NRE Pay Off

So what is the recommendation?

Given the increased uncertainty in global markets predicting the USD INR rate 1 year rate is nothing short of speculation. I personally do not think the USD INR will cross 77 or even if it crosses will stay at that level at the end of one year. To do the FCNR deposit for a very, very small gain over NRE deposit in the event USD INR crosses 76 does not look great from the risk reward perspective but if you really want to try then put half your money in NRE FD and the other half in USD FCNR deposits.

Finance, Investment

Widget, widget on the wall, Which is the Best Investment of all?

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Finally the tool to compare investment options is here.

Its configured for Indian Tax Rates for FY 2017 -2018 and works pretty accurately – I tried to test as much as I could but feel free to point issues if you find some.

To use the tool simply input your Investment amount and the Total income before this investment. That will calculate your tax bracket.

Then choose the category of investment and input your expected rate of return and the tool will give you the comparative pre and post tax earnings.

Its that simple!

For applicable tax rates refer to – Capital Gains tax for NRIs- It’s not that simple

Economics, Finance, Investment

Another Demonetization Coming?

21 Comments

The money changers in Arcade, Raffles place are again offering a rate better than the spot rate. The current spot is 47.20 and you could get 47.75 with the money changers.

Again the notes are all legit and there is nothing wrong that I could find.

Last time this happened, it was in October 2016 and the 1000 and 500 Rupee Notes were Demonetised in on 8th November 2017 (https://adityaladia.com/2016/10/11/cash-rate-of-inr-better-than-spot-in-arcade/)

I could not help but wonder if 2000 Rupee notes will soon be withdrawn and prove the rumours correct. If that happens where will Indian GDP go is anybody’s guess but till then if you are visiting to India then exchanging money in Singapore and carrying back is a profitable bet.

Finance, Investment, Remittances

Capital Gains tax for NRIs- It’s not that simple

23 Comments

As an NRI, you would have wondered many times, what parts of your Indian Income are taxable and what are not and trust me you are not alone.

Under the Indian Income tax act, the tax rates, deductions from income, exemptions from taxation all change depending on the nature of income and residential status of the individual. With the ever changing tax provisions, even if you searched online the chances of finding the information you are looking for would not be easy and filtering out the tax provisions that are applicable to an NRI is even more difficult.

Not being able to find consolidated tax provisions on common investments used by NRI’s I decided to compile the information myself and hope that fellow NRI’s will find it useful.

NRI’s mostly invest in Fixed Deposits, Bonds, Mutual Funds, Stock and Property which would generally give rise to income under Capital Gains or Other Income (Bank Interest or Dividends) under the Indian Tax laws.

I have tabulated the provisions that an NRI should be aware of for FY 2017-2018 (click on table to open in new window)

nri-capital-gains

 

One of the most interesting things to note is that the basic tax free exemption is not available to an NRI on Equity Investments.  What that means is that if an NRI gained 2,50,000 Rupee by investing in stock market the whole 2,50,000 Rupee is taxable. If these gains are long term (asset held for more than 1 year) then there is no tax liability but for short term gains the tax rate is @ 15%. So an NRI would pay Rs.37,500 in taxes, the income would not attract any tax in hands of a resident Indian.

Another interesting fact to note is that the gains on redemption of Sovereign Gold Bonds are not chargeable to tax if held till maturity.

With difference in tax rules being different in different countries an investor should consider the tax domicile of the investment to maximise returns. In Singapore and Hong Kong the Capital gains, Bank Interest and Dividends are not taxable, however in USA and UK these income are taxable.

For example if an NRI bought a mutual fund in India that returned 20% over a period of 6 months then his gains would be taxed at a flat rate of 15% resulting in a post tax return of 17%. Buying this same fund in Singapore would have been as the gains are tax free and the investor pays no tax.

Similarly for bonds the interest is taxable in India and taxed at the marginal rate based on your income bracket but tax free in Singapore and Hong Kong.

E.g . An NRI whose total income is over Rs. 10 lac (30% tax bracket) buys a bond that pays 9% interest p.a. The post tax yield of this investment would be 6.3% . Add to it the cost of transferring funds to India of around 0.8%, the yield drops to 5.5%. If the plan is to remit the money back to Singapore on maturity, which will cost another 1%, the investment would yield 4.5% only.

These are just 2 examples to get you thinking. There innumerable scenarios that I can come up with based on different countries of residence and each individuals tax profile. All I would like to highlight is that an investor should not underestimate the impact of taxation and ancillary costs while making investment decisions and look at all aspects before making an investment decision.

Watch out for an investment comparison tool that I am working and will post it here very soon. Till then keep reading and sharing.

Finance, Investment

To Pay-off or Not to Pay-off?

4 Comments

For the past few days we have been debating whether it makes sense to pay off a housing loan in India by taking a cheaper interest bearing loan in Singapore and following the suggestion of one of the readers I decided to make a post dedicated to housing loans.
Before answering the question of paying off a more expensive loan with a cheaper one in Singapore, let me list down some of the aspects that can influence the decision.

  1. An interest payment on a housing loan tends to be around 2 to 3 % higher than the interest that one would earn on a NRE FD.
  2. The principal payment on a Housing loan is deductible from taxable income upto a amount of Rs. 150,000 per annum.
  3. The deduction on housing loan under section 80 C is subject to the overall limit of 150,000 which includes payments made life insurance payments, PPF, ELSS, Tax saving fixed deposits etc.
  4. The deduction under 80C for housing loan is only for the principal paid in a given financial year and not the interest portion of the EMI paid. Which means that tax benefit on account of housing principal payment will increase gradually over the term of the loan.
  5. The interest paid on the home loan is deductible under section 24 of the income tax act and if you look at the table below it would gradually decrease over the period of the loan. This interest is deductible upto Rs. 200,000 per annum.

Adding benefits under section 24 and 80C one could theoretically deduct Rs. 350,000 per annum of EMI paid subject to limits imposed by individual sections . Benefit under both sections is available to NRI’s.

The tax benefit can change over the period of the loan as the benefits under SECTION 24 and 80C can be revised as a part of the yearly budget exercise.

These tax deductions are beneficial only if one has taxable income for the year.

Another important factor to consider would be any penalty that your bank might impose for early repayment of the loan.

To help with further discussion, I have created the below widget where you can enter the amount of the loan, the interest rate, term of the loan and the year in which loan was taken to get the EMI and payment schedule (rounded to first integer).

If you observe then during the first few years one’s EMI mostly covers the interest payment and less of principal amount and the situation  reverses as the time passes by.

However the interest rate that one is paying remains constant throughout the tenure of the loan irrespective of whether it’s the first year or the last. By virtue of decreasing outstanding loan amount (principal amount) the EMI covers more of principal over time and helps pay off the loan.

Therefore it would be wise to take a cheaper loan in Singapore to pay off a expensive loan in India subject to:

  1. The total differential in interest rate is in favor of the cheaper loan.

E.g. If the current loan is at 9.6%, the loan prepayment penalty is 1%, the tax bracket in which the individual is 30% and total emi is less than 29k per month then the break even point for the new loan in Singapore would be a effective interest rate of 5.72%

2. If the person is in a lower tax bracket or has no benefit by way of deductions from housing loan then the break even point above would be 8.6%

3. The individual taking a personal loan in Singapore or any other country has relative certainty of continued cash flow or employment for the tenure of the loan.

Also one should remember that the loan repayment (interest and principal) of the loan taken in Singapore or any other country does not qualify for any tax rebates in India.

Other factors like expected future exchange rates, anticipated changes to tax laws, whether one has a fixed rate loan or floating rate facility and outlook of interest rates can also be considered but the more variable one adds the more complicated the decision making process will become.

In Singapore you can avail a personal loan upto 4 times your monthly salary. So if both husband and wife work you can get a bigger loan.

Citibank, in my experience tends to offer best rates for 6 months personal loan (if you have been a regular customer). Dbs and HSBC tend to offer the worst rates from what I have heard from acquaintances. Loans longer than 6 months tend to cost more from banks and tapping into into family, friends or Bullion backed facilities are other good alternatives.

The bottom line is that an expensive loan should always be paid off or replaced by a cheaper loan. The same applies if your investment yields less than the cost of home loan then sell off your investment  and reduce your debt first- remember every penny saved is every penny earned.

Finance, Forex, Remittances, SGD INR

Indian Rupee – Real star or …

64 Comments

It’s a very interesting phenomenon every time SGD INR falls – people panic and there is a flurry of questions on SGD INR’s future. To me this anxiety is similar to a house owner checking on the market rate of the house they live, every week, and feeling sad if the latest transacted price in the neighborhood went down or celebrating if it goes up. In reality, this is just perceived loss/profit and is irrelevant unless the person is trading in properties and regularly buys and sells them for a living.

Anyway, leaving perceptions aside, lets look at how Indian Rupee has really performed against major currencies in the past 3 years before I turn my focus to SGD INR.

inr-summary

The Rupee has fallen against USD and JPY, against Chinese Yuan and Singapore Dollar its a flatline and the gains against EUR and GBP are not because Rupee has fundamental strength against them but because the 2 currencies have weakened due to their own issue – ECB monetary stimulus and Brexit vote respectively.

Also worth highlighting is Rupee’s inherent volatility where it went from 68/69 against the US dollar in Aug 2013 to 58 around Election time in 2014 and is back up at 67 mark – all in a matter of 3 years (refer comparative 1, 2 and 3 year charts at the end)

There is no doubt that the Rupee has been pretty stable in the past few months and the RBI has done a fantastic job of curbing the volatility in the face of BREXIT, expected US fed rate rise, Increasing Oil Prices,Redemption of FCNR deposits and escalating tensions with Pakistan.

But have the rupee or economic fundamentals changed to much in past few months? -I don’t think so.

India still imports 80% of its crude oil and as oil prices go up they would put a strain on the current account, the goods manufactured in China are still way competitive both in terms of cost and quality (maybe that’s why rupee is following the Yuan trajectory) and the NPA situation with Indian banks is still worrisome and could result in market turmoil.

Investing in NRE FD’s has generated stable returns depending on when one invested, refer – (https://adityaladia.com/2016/02/11/you-would-be-out-of-money-80-of-days-if-you-transferred-money-to-india-in-2015/) and would slowly stop being an attractive avenue as the interest rates in India go down.

Now coming to SGD INR, the current weakness is mostly due to flurry of bad news (or expectation management as I call it) on the economic and employment front. I have always maintained that the MAS is pro-active and lets the SGD adjust quicker to the market events as compared to what RBI allows or can allow with the INR.

All the expected or known negatives are already priced into Singapore Dollar and any other movement would be due to fed rate decisions. Even after the news of GDP missing estimates the SGD only fell around 1% which is very normal in the current volatile markets.

On the other hand there are a lots of factors for the Indian Rupee that needs to be priced in – merger of banks due to NPA’s, challenges for exports due to relatively strong rupee – China and other ASEAN countries, increase in crude oil prices, looming fed rate increase and of-course any escalation on the international borders with Pakistan.

As with the answer to keeping money in Singapore Dollar or remitting to India, the response is unique to every individual depending on their investment portfolio, diversification, cash flows and risk appetite.

48 would act as a very strong support and do factor in the cost of transferring money into India and remitting back, the cost of loan (if you are taking one) and tax obligations if you invest in property or stock markets when making any such decisions and don’t get stuck on specific numbers – transferring money at 49.80 is just as good as transferring at 50.

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INR performance – past 1 year

inr-1-year

INR performance – past 2 year

inr-2-year

INR performance – past 3 year

inr-3-year

Finance

Cash rate of INR better than spot in Arcade

11 Comments

It’s hard to believe but it is true. Some money changers are offering a cash rate of upto 49.80 for 1 sgd in arcade building (raffles place). 

The current spot is around 48.40 which means if you go to these few money changers you gain around 2.5% over spot. 

How they are able to do this is beyond my comprehension but it’s true. I changed some money, checked on notes and everything is legit (atleast to my eyes) 

So if you are looking to change some money for upcoming travels to India then do grab this opportunity. 

Finance, Forex, Remittances, SGD INR

SGD INR crosses 50!!

495 Comments

Finally the SGD INR RATE crossed 50, it’s taken 3 years for the pair to return back to this level and there is more appreciation to come.

In Aug of 2013 the Rupee was battered to all time lows and the RBI had a new Governor in Raghuram Rajan in September. The fiscal situation looked bad then with oil at all time highs and political uncertainty in India. With some bold policy moves (NRE FD’s and FCNR scheme) and good luck (falling oil prices) the RBI was able to reign in the fall and stabilize the foreign reserves situation.

But with global uncertainty in form of referendum on Britain’s exit from EU, the trajectory of Fed fund rate increases and increasing oil prices exit of RBI governor could not have come at a worse time.

The FCNR deposits of 3 years back are due for redemption between Aug and Nov of this year which would be a 20 billion USD outflow of reserves. Gold and Oil prices have bounced back from all time lows which will add to India’s woes.

If Britain decides to exit the EU then the global uncertainty will increase and any foreign firm will reevaluate their overseas investment plans which will include India.

What is most surprising is that a RBI governor who has been dead correct in warning the other federal reserves that cheap money policy is not a cure to global financial woes and has been instrumental in stabilizing the Rupee and control inflation is being let go due to political reasons – just because he decided to disagree with the government and force them to make the right policy changes he is being penalized.

Anyway the damage has been done and I would not be surprised if Rupee hits the 75 mark against the USD by November this year and if that happens SGD INR will be at 55.

However in the short term a range of 49 to 52 would be seen. For today I expect intraday volatility where after the initial fall RBI will try to stabilize the Rupee though a gradual fall in coming weeks should be expected as the international event unfold.

….. And remember 52 is not far away.