India likely to lean on expatriates to support its battered currency

India is likely to turn to the large diaspora of Indian expats globally to try to prop up its battered currency that has hit multiple record lows against the US dollar in recent weeks, analysts say.

The government of Prime Minister Narendra Modi and the central bank of Asia’s third-largest economy are reportedly considering the possibility of tapping non-resident Indians for foreign exchange inflows, an effort to stem the slide of the rupee.

There are multiple ways in which the government can try to arrest the rupee’s fall and address the growing concerns of further depreciation of the currency.

“Typically, the government issues bonds denominated in dollars targeted at NRIs, or encourages banks to open dollar deposit accounts for NRIs,” says Indradeep Ghosh, the associate professor and faculty dean at Meghnad Desai Academy of Economics in Mumbai.

“If there is enough take-up of such offers, then that will drive a supply of dollars and a demand for rupees in the forex market, thereby arresting or even reversing the depreciation of the rupee.”

In his opinion, the authorities are likely to go the route of tapping NRIs for funds given the current scenario.

The rupee has fallen by almost 15 per cent against the US dollar this year, and is Asia’s worst-performing currency, dragged down by factors including rising US interest rates, higher oil prices, global trade tensions and concerns about India’s expanding current account deficit.

On Friday, the rupee was trading at about 73.60 (Dh3.68) against the dollar. A fall in the value of the Indian currency makes imports more expensive – a major issue for a country that has heavy dependence on oil imports – and it drives up inflation.

With the government and Reserve Bank of India discussing plans to attract money from Indian expats, the steps may be unveiled as early as this month, according to Bloomberg News.

India's ministry of finance and the RBI did not respond to The National's requests for comment.

This is not the first time policymakers are turning to expatriates to help support the Indian currency.

“The biggest channel for boosting inflows will be through some form of NRI bond issuance – an option that has been used three times in the recent past,” according to a research note by Nomura.

These were the Resurgent India Bonds scheme used in 1998, the India Millennium Deposit scheme in 2000, and the FCNR special deposit scheme which was introduced in response to the rupee’s plunge in 2013. On all three previous occasions, these schemes were effective in stabilising the rupee.

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The total amount raised through NRI bonds was 1 per cent to 1.4 per cent of the gross domestic product of India, according to Nomura.

“At current nominal GDP, that would amount to raising between $26bn (Dh95.50bn) and $37bn,” the Japanese lender  says.

It explains that such a move is not normally used as a “first line of defence” because it adds to India’s external debt, but it would be “effective in plugging the funding gap”.

NRIs already play an important role in India’s economy and help in narrowing the current account deficit because of the large flows of remittances and bank deposits they inject into the country’s financial system.

Remittances to India grew by 9.9 per cent to $69 billion in 2017 over the previous year, making it the world’s largest recipient of remittances, data released by the World Bank show.

NRIs in countries including the UAE and US are benefiting from the rupee’s slide against the dollar, which means their earnings abroad can be exchanged for more rupees at home, as the dirham is pegged to the dollar.

This led to a record $3.2bn in bank deposits from NRIs in April compared to $407 million a year earlier, according to RBI figures.

Deposits in India can deliver annual interest rates upwards of 8 per cent, which is far higher than most expatriates would receive in their countries of residence.

“It’s been anticipated and we’ve been expecting the government and RBI to announce that some bonds will be introduced,” says Chavvii Prabakar, the chief executive of Global Indian Solutions, Gurgaon company that provides assistance to NRIs in managing their assets in India. “In the past, this added to our dollar reserves and helped curb the fall to an extent and impacted the rupee positively,” Ms Prabakar says.

She explains that Indians based overseas are showing interest in investing in India, including investments into equities, either directly or through mutual funds. This is despite foreign institutional investors pulling money out of India.

“A lot of NRIs want to take advantage of this scenario because any asset class they buy in India is at a cheaper rate,” Ms Prabakar says.

If the government and the central bank decided to go ahead with selling bonds to NRIs, she thinks it will be hugely popular among Indians abroad.

However, some experts are not convinced that luring funds from expats will help the rupee significantly.

“Encouraging non-Indian residents anywhere across the globe to send their money back to India would not encourage a meaningful change in fortunes for the Indian rupee.

“It would also require a serious amount of money to be repatriated to have any medium-term impact on the currency,” says Jameel Ahmad, the global head of currency strategy and market research at FXTM, a global currency broker.

The rupee is not alone and emerging market currencies in general have struggled this year, he points out.

“External uncertainties” are playing a major role in the weakening of the rupee, which is why steps taken by authorities could have a limited impact.

“It would require a host of many different measures for India to encourage a change of sentiment for the rupee,” says Mr Ahmad. “No individual measure or action will be able to change the course of weakness as long as market sentiment remains negative on the currency.”

The government has already taken steps to try to support the rupee, which seem to have had a limited effect so far in controlling its depreciation. These measures include raising import duties on 19 products including air conditioners and footwear, an effort aimed at reducing imports into India and thereby narrowing the current account deficit.

Meanwhile, there may be other ways in which NRIs may be able to boost India’s economy. Property developers say that they are seeing more enquiries from NRIs who want to buy homes while the rupee is weak.

“The depreciation in the rupee obviously presents a very attractive proposition for NRIs as it enables them to purchase property at cheaper rates in India,” says Surendra Hiranandani, the chairman and managing director of House of Hiran­andani, a luxury real estate developer. “While investing in a home is a matter of necessity for many, NRIs predominantly invest in real estate to diversify their asset exposure.”

But there are several factors weighing on the currency that are beyond the control of India’s authorities. If these elements persist, it remains a concern that NRIs may not be able to what is required to shore up the rupee in this instance.

“For the Indian rupee to recover it actually needs a change in the external environment, with a weakening US dollar being one of the best things that could happen to strengthen demand for emerging market currencies,” says Mr Ahmad.

“The removal of external uncertainties like geopolitical tensions, political risks and a breakthrough in the trade war tensions would also provide a huge boost in demand for emerging market currencies, including the Indian rupee.”