What will attract NRI flows into India? definitely, bullish outlook on rupee
There are stories around that NRI flows have drained because of rupee appreciation from above 57 to below 53. They go on to say that weak rupee will definitely attract NRI flows into India.
NRIs do not look at spot value of rupee when they bring in funds; whether it is 40 or 60 it does not matter for them. What does matter is the exchange rate trend. Where will rupee be at the end of 1Y or 3Y or 5Y? Will the expected future value of rupee cover the interest differential and provide attractive yield arbitrage to shift investments from foreign currency to rupee?
So, it is important to retain bullish undertone on rupee to pull NRIs and not the spot value of rupee. NRIs also look at prevailing forward premium to lock-in higher dollar yield on fully hedged basis. If FX forward premium is low (say, 1Y below 4% when 1Y rupee return is say 9%), NRI flows come in on leveraged basis (by borrowing dollars off-shore and shipping them into India).
What is essential to attract NRI flows is Rupee exchange rate stability and low FX premium.
Moses Harding
There are stories around that NRI flows have drained because of rupee appreciation from above 57 to below 53. They go on to say that weak rupee will definitely attract NRI flows into India.
NRIs do not look at spot value of rupee when they bring in funds; whether it is 40 or 60 it does not matter for them. What does matter is the exchange rate trend. Where will rupee be at the end of 1Y or 3Y or 5Y? Will the expected future value of rupee cover the interest differential and provide attractive yield arbitrage to shift investments from foreign currency to rupee?
So, it is important to retain bullish undertone on rupee to pull NRIs and not the spot value of rupee. NRIs also look at prevailing forward premium to lock-in higher dollar yield on fully hedged basis. If FX forward premium is low (say, 1Y below 4% when 1Y rupee return is say 9%), NRI flows come in on leveraged basis (by borrowing dollars off-shore and shipping them into India).
What is essential to attract NRI flows is Rupee exchange rate stability and low FX premium.
Moses Harding
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