Category Archives: Remittances

SGD INR: Rollercoaster First few months of 2021

Just yesterday, one of my friends mentioned going to universal studios and experiencing the rollercoasters and that reminded me of movements in SGD INR in the past few months. I said, you can experience a roller coaster just by trying to time remittances from from Singapore to India

Having started the year at 55.25 the pair saw lows of 53.80 by March and sharply reversed back to 55.75 in first week of April. That is a move of approximately 3% down and back up within 3 months which is unusual in the currency markets.

I had expected the pair to drop to 57 SGD INR 55 achieved, Target 57 last year but with RBI intervening in the forex markets and India’s better than expected figures of containing covid resulted in short term strength.

The rupee moved sharply lower after the RBI MPC meeting though there was nothing in the meeting that would warrant such a move. So what has caused such volatility in SGD INR?

Covid Connection?

With Covid cases rising sharply over the last month the fear of economic recovery being derailed is high. One could attribute this move to Covid – however, if you look at exchange rate in September 2020, when India experienced the peak of first wave, the exchange rate was between 53.5 – 54. So I don’t think its covid anymore at play here.

Correlation to Indian Bond yields?

Similarly the Indian G-sec Bond yields have fluctuated between 5.8 to 6.20% in the past three months and seem unlikely to have caused this move. Moreover, with a large borrowing agenda in 2021, RBI would do everything in its power to keep the yields stable / low thereby containing the cost of funding for the government. So I don’t think the expectation of increasing yields would have caused this move.

Falling Oil Prices?

Brent Crude traded close to 70$ in early march and has fallen back towards the 60$ mark in April. India imports almost 80% of its oil which is traded in USD. Having a strong rupee when oil prices are high and letting them fall a little as oil goes lower can help the cost of oil in rupees stable. I believe that this could be a small factor in RBI allowing the rupee to correctly sharply lower and I would watch the oil prices over the next few months to get a sense of where INR may be headed. However, I don’t think this was the real reason.

RBI reducing intervention in the forex markets?

This I believe is the real reason behind the rupees move lower. There was a very low risk carry trade in the market whereby an institution with access to dollar market would borrow in dollars and invest in rupee bonds thereby having an arbitrage of anywhere between 1-3%. The belief was that RBI would intervene and keep currency anchored around the 73 mark against the USD. RBI may have decided to purge such trades by either mopping up dollars temporarily or not intervening in the forex markets.

I am not saying that RBI is manipulating the currency but tri agenda of subtly boosting exports, lower oil prices cushioning the cost of outflow and objective of flushing out traders with one way bets might have resulted in the sharp moves recently.

What to expect over next 3 months?

I think that 55 is now the new base rate with fluctuations of Rs 1.5 on both sides of the mean.

With MAS scheduled to release monetary policy data sometime in April, SGD INR could touch 57 in a knee jerk reaction or fall back to 54 in a quick move. There are analyst reports that suggest that with economy still not open to tourists SGD may continue to remain weak against the US Dollar. However, with housing prices inching up I don’t think MAS would want a weak dollar which would make Singapore properties cheaper for foreigners.

In a nutshell, I expect the roller coaster ride to continue and would take any move above 56.25 to transfer and invest in India. There is still value in some sectors of the equity markets and then there are low risk investments like Bharat Bond which I analysed in the previous post – Bharat Bond Better than NRE FD

SGD INR 55 Achieved, Target 57

SGD INR finally crossed 55 after appreciating 5% from the exchange rate in Nov 2019 – 52.60. Theoretically speaking you would have gained slightly more by transferring to India but after accounting for the transaction costs it might not have been much.

It stayed below the 55 mark as I had written more than 2 years back SGD INR flirts with 52 could it hit 55. That time i did not think it will cross 55 but now I am updating my SGD INR target to 57, yes you read it right, Fifty Seven!!

By when?

I expect this to be achieved by the end of the year and then the rate should slowly decline back to 54.5 leading upto the Indian Budget in Feb 2021

The rationale being that USD INR will touch 76.5 and USD SGD will move to 1.34 mark in the short run.

Why will INR weaken?

Inflation and rising COVID cases will make it hard for INR to appreciate, the fund flows on account of mega deals that Reliance Industries has been doing should come to an end and at some point the Foreign Institutional investors will book profits and withdraw their gains from the stock markets. RBI will smoothen then currency movements but given the inflation has very little room to tweak the interest rates.

Why would SGD strengthen?

Singapore is one of the last few countries that offer a positive interest rates on government securities and is politically stable unlike US or parts of Europe. This gives SGD bonds safe haven status and money comes in. The same thing happened in 2009-2012 when SGD rose to as high as 1.22 against the USD.

Does this only benefit SGD INR?

Next 6 weeks should provide opportunity across currencies – EUR INR could see 90, GBP INR 99 and USD INR – 76.5. So those looking to transfer can watch out for these levels.

Instead of waiting for absolute levels, I would plan for any transfers based on what is your end goal. If you are getting a high interest rate in NRE FD’s or other investments now then even current rate of 55.4 is a good rate. Each of us have different goals, tax status and risk tolerances. Therefore plan based on your needs and not get stuck at specific levels.

There are other options if you do not want to transfer the money to India and yet want to gain with the short term increase in rates, watch out for the next post.

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

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.

SGD INR in 2018, the inflation conundrum 

It’s been really long since I wrote a post dedicated to SGD INR and as 2018 fast approaches time is ripe to share my views on how SGD INR could move in the following months.

Given the politically volatile times that we live in and dilemma the central banks in developed economies face with prolonged period of low inflation,  a few interesting scenarios might play out.

Starting with India, with the implementation of demonetization and GST the countries GDP has taken a hit, which was not entirely unexpected. Any country that has implemented GST, experienced turbulent time of approximately 18 months before the benefits started to roll in. Alongside the GST implementation, the government has also been aggressively pushing for interest rate cuts to increase the economic activity. However, with the recent inflation print which came above expectations and crude  oil prices persisting above 50 USD a barrel,  the chance of rate cut in December ’17 is next to zero. The risk of inflation further accelerating is high and RBI has rightly held off reducing rates further until there are signs of moderating / low inflation. Now, a lot of this can be resolved if the manufacturers/producers start passing the benefits of reduced taxes from implementation of gst to consumers, this would result in reduced prices, which will lead to lower inflation and set the stage for a RBI rate cut but structural reforms of this scale take time to fine tune. 

On the political front, the elections in prime ministers home State of Gujarat are scheduled in less than a months time followed by a few more states with the National elections soon in sight in 2019. Any upset in the elections or signs of losses to the ruling party will result in re-evaluation of investor sentiment in India.

Now looking at the global factors, the 2 major central banks have diverged their monetary policies with Federal Reserve firmly on a path of rate hikes and ECB continuing with its Bond Purchases and negative interest policy well into September 2018. Japan has also indicated to continue with ultra loose monetary policy until inflation hits 2%. How did central banks arrive at this 2% magic figure is still beyond my understanding but that is a topic for another post. 

With the US Federal Reserve increasing rates,  reducing interest rates will be extremely challenging for RBI and without lowering rates encouraging new investments in India that leads to Job creation a distant dream. A divergence of relative yields between US treasuries and Indian bonds can result in a sudden flight of capital from the country.

At the same time the valuations in the Indian stock markets are at all time highs and the market trades at PE of over 23 which again by historical standards is high and suggests a correction. Infact the global stock markets are trading at an all time high with this liquidity driven rally. With Federal Reserve increasing rates, the investors will be forced to consider cost of  capital which could result in market correction and money being taken out of India. 

The silver lining amongst all this is that Indias foreign reserves have crossed 400 Billion dollars and that would provide some cushion against external shocks. 

In Singapore, the inflation and GDP growth has picked up but is still erratic. Singapore Dollar being a managed currency against a basket of currencies, of which USD, Euro and Japanese are a part of, the policy divergence between US and Europe will be interesting to watch. MAS administers the monetary policy through exchange rate and is maintaining a neutral slope of exchange rate band but with US Treasuries strengthening yield curve how long would this band remain flat is a question worth asking. 

Another very important factor not much talked about is the political succession in Singapore. Prime Minister Lee Hsien Loong has expressed his desire to step down as the prime minister or atleast have a succession plan in place. Who will succeed him and the political fall out from that move can impact Singapore economy and SGD. 

Singapore is fast trying to re-invent itself and write the next chapter of the growth story by catching on to the fintech wave and bio medical Research. Can these initiatives bring in new investments and create jobs will have to be seen.

So both currencies have their set of political risks and also will be impacted by increasing US interest rates. 

Singapore being a smaller economy and having shown greater nimbleness to react to global events is slightly better placed when compared to India making SGD slightly stronger than Rupee on a relative basis. 

I believe that just like 2017, 47.50 will play a pivot for the currency pair and we could see a range of 46 to 50 in the coming months as the inflation conundrum plays out – India wanting a lower inflation so that they can cut interest rates and developed world wanting higher so the rate increase cycle can continue. 

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

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.

Indian Rupee – Real star or …

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

SGD INR crosses 50!!

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.

Tax Free Bonds: Better than NRE FD’s

image

Yes, you read it right! Tax free bonds are better than NRE Fixed deposits.

After all these years of recommending NRE FD’s as the safest bet for investing in India, I am changing my recommendation to Tax free bonds (in no particular order) by IREDA, NHAI, NABARD, REC and HUDCO.

Lets compare the bonds to the NRE deposit

1. NRE Fixed usually give the highest rate for a lock in of 2 or 3 years and are averaging between 7.8% to 8.2%, which means that the reinvestment on maturity would be at the prevailing interests rates.
2. NRE deposits have a penalty in case of pre mature withdrawal
3. Interest on NRE deposits is tax free

A Tax free bond on the other hand is giving a 7.64% for a period of 15 years (NABARD which opens tomorrow – 9th Mar 2016) in retail category (less than 10 lacs) or half a percent lesser for amounts exceeding 10 lacs.

You must be wondering why am I recommending the bonds when they give lesser interest and are tax free like the NRE FD? The Central Bank interest rates across the world are going down and India has already had a few rate cuts which makes these Bonds attractive. As the interest rates will be reduced the value of these bonds will increase (capital appreciation) . These bonds are more liquid than a FD as they are traded on the stock exchanges which means that one can sell the bond without incurring pre mature withdrawal penalty in case of FD. Further for a slightly lesser interest rate these bonds let you lock in a higher interest rate for next 15 years.

If this has not convinced you then let me tell you the most important reason why I am recommending these bonds – interest on NRE FD’s becomes taxable if a NRI returns to India. Depending on the individual residency criteria in section  6 of the Income Tax of India on return a NRI becomes a Tax Resident in 6 months to 2 years, upon which the NRE accounts are converted to a Resident Rupee Account, which means that any interest that accrues on your NRE account after you become tax resident becomes taxable.

These bonds on the other hand assure tax free income for next 15 years from the date of allotment.

Now the fine print – not all bonds are open to NRI’s for investment, however if you have a resident bank / brokerage account you could use that to apply for these bonds and / or purchase them from open market and benefit from capital gains and long term tax free interest income.

You would be “Out of Money” 80% of days if you transferred money to India in 2015

The last few days of Chinese New year holidays allowed me to spend some time on SGD INR analysis. I always had a feeling that transferring money to Indian specially with a view to play on the interest rate differential would not have been beneficial in the last year and I had to test my feeling against some actual numbers.

image

I took the average investable Tax Free NRE FD rate as 8% and cost of transferring money as 1%. The interest that someone could earn in Singapore was taken as average of 2% (DBS Multiplier, OCBC 360, UOB One or some money market funds) which brought the effective interest rate differential as 6% (8% – 2%).

There might be a few of you who could have got slightly better NRE FD rates and also managed a better transfer rate, however in my observation banks or transfer services usually charge anywhere between 0.8% to 1.5% as remittance fee. This fee could be charged as a out right fee or built into the exchange rate that they offer you. Similarly I took the cost of transferring money back from India as 1% as well though people tell me it can be close to 2%. I have personally never transferred money from India so just went in with the 1% charge.

The result of number crunching vindicated my gut feel  – there were only  39 days in 2015 (around 11%) which provided a better return if someone transferred money to India, invested in NRE FD and transferred it back to Singapore as compared to keeping money in Singapore and starting to transfer to India once SGD INR crossed 47.50.

Interestingly of those 39 days 12 were in Jan 2015 and remaining between 24th April to 22 May and few in mid June.

The number of days went up to 62 (around 20%) if the person decided to leave money in India instead of bringing it back but the period of transfer remained in first half of the year.

Anyone who panicked and transferred money since July would be “out of money” based on today’s DBS remittance rate of 48.50 (Market rate around 48.90).

Of-course the rates can and will change in the coming days and a few more days of 2015 might become “In the money” but I would rather transfer around 48 than at 46 – it translates to gains of around 5%.

SGD INR 2015

 

 

SGD INR crosses 48!

image

The SGD strengthened to 1.4150 against USD overnight and that has pushed SGD INR to 48.02 mark. I am expecting INR to strengthen when the Indian markets open around 11:30 am Singapore time.

If you are looking to transfer money today then the next 2 hours is a good time using DBS Remit. The offered rate is 47.57 and is expected to fall down once the Indian markets open.

Disclaimer: These are my views and not investment/financial advice. I bear no responsibility for any decisions made by readers.