Non Resident Indians and the falling dollar

Non Resident Indians (NRIs) that have plans of retuning to India are obviously concerned about the falling dollar. Just this year, the dollar has fallen by more than 13% (as compared to the rupee) and is still falling.

One has to now contend with India's rising inflation AND the depreciating dollar - that's a double whammy and cause for much concern.

I don't buy the official Govt inflation numbers (neither the US govt, not the Indian Govt). Frankly speaking I don't know how they come up with numbers that are so grossly inaccurate. Govt of India puts inflation at 4.5% (or thereabouts) - that's not even CLOSE to the real number.
And the same goes for the US inflation numbers (under 4%) - have you checked the price of gas and milk lately? Have you renewed your apartment lease yet? Oh I forgot - they don't consider these aspects when coming up with the inflation number - well what do they consider? - sorry for digressing, maybe I should leave this for another post.

OK so coming back to the NRI situation. Interest rates in India are close to 9% for Fixed deposits (10% for senior citizens) - mainly to keep up with rising inflation (which is officially at 4.5% - ha!). Interest rates in the US are around 5% and dropping.

Lets say you are an NRI and have an asset allocation plan that is 60% diversified stock and 40% fixed income (all held in dollars) and you plan on retiring in India. In this portfolio, the cause for most concern would be the 40% (fixed income that is earning 4%-5% in the US). If this is held in dollars, it is going to be tough to keep up with inflation in India (which is a lot higher) and one of the most important goals of fixed income is to AT LEAST keep up with inflation.

So how should you tweak your overall portfolio if you plan on retiring in India?

• Hold your long-term fixed income allocation in rupees in India. That way it will keep up with inflation in India. You can diversify across bank fixed deposits and debt mutual funds
• Also hold the India part of your stock allocation in rupees in India
• Hold the rest of your diversified stock allocation in dollars in US mutual funds

This way, the fixed income portion of your portfolio will fulfill its goal of AT LEAST keeping up with inflation in India. Also, you will still hold a widely diversified stock portfolio (by keeping that in dollars in the US) which you would not be able to do if you moved everything to India. India does not have any "international" equity funds that invest outside of India and you will lose the diversification of your stock portfolio if you pull out everything from the US and invest in India. And you never know, the dollar may come back in the next 10 years - then what?

So to summarize - move your fixed income allocation and India stock allocation to India. Hold the rest (diversified stock) in US Mutual funds. And don't forget to pay taxes to Uncle Sam for the interest that you make from your fixed income allocation in India.

Due credit for this idea should go to some folks over at the R2I Finance forum (link on right nav)

Related posts

Post1 - Rupee and dollar
Post2 - Investing in India - different strategy