Though the government announced measures – such as scrapping of withholding tax on masala bonds, and the relaxation in overseas debt regime — to arrest the fall in the rupee, macroeconomic triggers and global cues will come to play to weaken the currency further.
As the government and the central bank, the Reserve Bank of India (RBI), are left with no ammunition to fortify the rupee with a resolve to allow the currency to find its own level, the volatility will continue and is expected to touch new lows.
The currency is under stress because of the widening current account deficit precipitated by the boiling crude oil prices, strengthening dollar, worsening trade war between the US and China, all external factors rather than internal, even as the Indian economy has clocked a GDP growth of 8.2% in the past quarter.
New deposit scheme for foreign investors
Experts are of the view that the weakness in the rupee is having a bearing on the investment behaviour of the NRIs and their fund managers as their investment scopes are getting wider. They are waiting in the wings for the government to announce a new deposit scheme to increase foreign investment inflows to check the slump in rupee value.
The government is betting on a sizeable flow from Foreign Portfolio Investors (FPIs), who already own securities worth $425bn (Rs30,810bn, £325bn) in Indian equities. Out of this, NRIs have invested about $75bn through India-focused funds.
However, it was feared that the FPIs would exit following a regulatory move on ownership disclosure. The market regulator Securities and Exchange Board of India (Sebi) has allowed more time in order to check such an outflow.
PK Sajithkumar, chief executive of Dubai-based financial services and advisory firm IBMC, is of the view that it’s an opportune time for FPIs to strengthen their portfolios, taking advantage of the rout of the rupee.
“FPIs who have entered the market when the exchange rate was hovering around Rs67 per dollar, or even earlier, should remain invested. For new entrants, it’s the ideal time to leverage the fall, which is expected to go deeper.”
The rupee tumble is also offering opportunities for retail investors in the Indian stock market.
Mukund Cherrusserry, director of TrendRiser Securities, an investment advisory firm, said it’s time for cherry-picking in Indian stocks.
Stock prices are expected to decline on account of the looming economic woes of the country when inflation rate will spiral and interest rates will go up with corporates facing increased cost of funds, he said.
Time for SIPs
This is also a good time to start investing in the Indian market through systematic investment plans (SIPs), said KV Shamsudheen, director of Barjeel Geogit Securities.
“There could be tightness in interest rates in the short term considering the fall in the rupee value. A cash crunch is in the offing, resulting in a bearish trend, offering a window to enter the market at lower levels, which will benefit SIP investors.”
With the Indian economy facing international pressure on the trade and fiscal deficit fronts, the central bank will be left with no other option but to increase interest rates.
Banks will hike interest on NRE (non-resident external) and FCNR (foreign currency non repatriable) deposit rates. Returns from NRE and FCNR deposits are fully repatriable and FCNR account allows the depositor to keep his money in foreign currency itself, saving on the exchange cost.
The Indian property market is another opportunity to cash in on the weakness of the Indian currency. The realty market outlook is rosy in view of the decline in property prices following the recent policy changes, implementation of GST (goods and services tax) and demonitisation. Prices are at attractive levels in most cities across the country and there has been resurgence in sentiment.
The flip side
On the flip side, NRIs who invested in leveraged Indian rupee deposit products offered by some of UAE-based banks will lose heavily from the decline in rupee value. These are mostly investors who bought leveraged NRE deposit products offered by banks in the UAE, in association with some Indian banks. These banks have been offering NRIs the opportunity to invest in NRE deposits, to make a better return on interest rate differential in India and the UAE.