Bank Accounts

One of the first things you should know as an NRI is that your existing bank accounts are no longer valid. The Foreign Exchange Management Act (FEMA) requires you to inform all the banks where you have an account, be it savings or deposits, about your changed residential status.

The banks will then classify your account as NRO (Non-resident Ordinary). Except for the change in nomenclature, there is nothing new about the account. You can continue using it as before. Payment of EMIs (Equated Monthly Instalment) can go on. You can also hold the NRO account jointly with a resident. But the balance in the NRO account cannot be remitted outside India.

If you want the funds in your account to be freely repatriable outside India, an NRE (Non-Resident External) account would be ideal. This account will be maintained in rupees and any debit or credit of foreign exchange will be converted into rupees.

It cannot be opened jointly with a resident but you can allow a resident to operate it on your behalf.

For example, you can authorise your mother to make local payments or even remit money to you through this account by giving her a power of attorney.

Investment options NRI s can invest only in five asset classes in India — bank deposits, stocks, mutual funds, real-estate and insurance. You can also invest in government securities and company deposits. But you cannot invest in PPF (Public Provident Fund), or bearer instruments such as NSC (National Savings Certificate) or Kisan Vikas Patras once your residential status changes.

Though you are barred from making any fresh investments, existing ones can be left undisturbed. However, they cannot be extended beyond maturity. You can continue to make periodic contributions to the existing PPF account even when you are abroad through your NRE or NRO account. When the investments mature, the proceeds will be credited to the NRO account.

Banks allow NRIs to invest in deposits through FCNRB (Foreign Currency Non-Resident (Banks) accounts. These are term deposits and can be maintained in some currencies such as the US dollar, pound sterling and yen. The funds in this account can be repatriated.

Equity Investments With the stock markets on a roll, you are welcome to join the party. As an NRI, you are allowed to invest to your heart’s content in both stocks and mutual funds.

While you can continue investing in IPOs (Initial Public Offers) unmindful of your NRI status, there are some procedures to be followed when investing in the secondary market. All along, as a resident, you would have used a demat account to buy and sell shares.

Now, this demat account has to be closed and the shares are to be transferred to a new NRO Demat Account. After this, you can either continue to hold those shares or sell them.

Although an NRO account means that funds are non-repatriable, the Reserve Bank of India allows funds from the sale of financial assets to be remitted outside India after some paperwork. Hence, wherever you are, you can enjoy the proceeds from the sale of shares.

To invest from abroad, you need to open a fresh NRI PINS (Portfolio Investment Scheme) demat account. PINS is a scheme of the RBI under which NRIs can buy and sell shares by routing them through their NRE/NRO account. (An NRE account is preferable, since you can freely transfer the funds abroad after selling the shares). Speculative transactions are not encouraged under PINS. Hence, you need to take/give delivery of shares.

For mutual fund investments, there are no procedural changes. Money can either be remitted from abroad or moved out of your NRE/FCNR accounts maintained at a local bank.

The redemption or the dividend proceeds will be credited to the same account. Again, investments can be made both on a repatriable and on a non-repatriable basis.

For these purposes, the PAN card you obtained when you were a resident will hold good. You need not apply afresh.

Insurance and Real-Estate Presently, NRIs can invest in life insurance policies in India without any limit on the cover. Some companies offer foreign-currency denominated policies and also allow you to pay the premium in foreign currency.

You can also invest in residential and commercial property in India without obtaining any special permission from the RBI. Investment in agricultural land/plantation property/farm house is, however, not allowed.

We will explore NRI investments in this category in greater detail in a future column.

The US Federal Reserve decided to cut interest rates once again in its meeting this week. Last month, when the Fed cut rates, it led to a surge of capital flows into India. In the six weeks since the last Fed rate cut, portfolio investment of USD 8.7 billion flowed into the Indian stock market. A higher interest rate differential combined with India’s growth story will mean that India will remain an attractive investment destination for global investors.A major concern arising from the surge in capital flows is the pressure on the rupee to appreciate. There has been immense pressure on the government to keep the rupee cheap. The government has tried to do three things: buying dollars in the foreign exchange market, imposing restrictions on capital inflows and liberalising capital outflows. If we look on a day-to-day basis, it may seem that the policy has had some success, but a longer term perspective suggests that it may have actually exacerbated the problem of the capital surge that we face today.

The last five years have seen a global decline of the dollar. Major currencies of countries where central banks do not trade in currency markets have shown an appreciation against the US dollar. The index of major currencies tracked by the US Federal Reserve shows that from mid-April 2002 to date, there has been a 34 per cent depreciation of the US dollar. Over this period, the dollar has seen a comparable depreciation against the Indian rupee of 20 per cent. However, the appreciation of the rupee has not been a normal market process. The rupee has rarely witnessed the two-way movement on a day-to-day basis in the manner that other currencies have. The appreciation of the rupee has been fought hard all the way by the RBI. As a result, there have been long periods when the rupee has appreciated slowly with the RBI actively intervening to prevent sharp movements. This slow appreciation has been truncated by periods of sharp volatility when the RBI let go and the rupee saw sharp appreciation.

These episodes of sharp appreciation have been painful and unpopular as the business sector was exposed to sudden destabilising shocks. After the appreciation of the rupee in March-April this year, many exporters complained that what hurt them most was not the appreciation itself but the suddenness with which it came. On the whole, we find that the RBI’s trading on the currency market has not prevented rupee appreciation. What it has given is painful lurches of the exchange rate, instead of a gradual process of adjustment based on ordinary market forces. The RBI’s currency trading has also injected excess rupees in the system, leading to high consumer price inflation which is a major concern for the government. The rising fiscal costs of the “sterilisation” effort through the Monetary Stabilisation Scheme (MSS) that tries to pull out this liquidity is borne by the exchequer. The RBI’s exchange rate policy has impacted the budgets of households and businesses as the RBI has tried to cope with its liquidity injection through hiking the cash reserve ratio of banks. There have been painful and unexpected hikes in interest rates on bank lending and home loan EMIs, unpopular with both the vocal middle class and corporate India. Attempts at capital controls to curb inflows have created instability in stockmarkets.

The most striking example of this was the latest attempt at restrictions on participatory notes. An important side effect of the attempt to prevent rupee appreciation has been that it has made the rupee a one-way bet. One, speculators see India’s huge foreign exchange reserves and know that it is unlikely that the rupee is going to depreciate in any serious way. The sole purpose of the reserves is to defend the currency in case there is a pressure on the rupee to depreciate. Two, speculators see the huge pressure on the rupee to appreciate and the futile attempts by the RBI to prevent this appreciation. When speculators see the difficulties policy-makers are facing, they conclude that it is not possible to keep up the effort to prevent rupee appreciation for very long.

A speculator who looks back sees that episodes of capital controls, or increased MSS limits, merely served as forecasts of future rupee appreciation. Not surprisingly, speculators know that either the rupee will stay where it is, or it will appreciate. In other words, the rupee is a one-way bet. The belief that the rupee can move only in one direction is leading to large amounts of speculative capital coming into India. This is larger than what it would have been had the rupee moved both ways and witnessed genuine volatility as in the currencies where central banks do not intervene. The policy of the RBI buying dollars might have been created to prevent rupee appreciation, but it is actually increasing the pressure on the rupee to appreciate. Critics of globalisation harp on unstable capital flows. But it is the policy mistakes of the government that are destabilising the capital flows.

The best way for India to respond to the surges in capital flows is to let the rupee be flexible. As a fast growing economy, India will continue to attract capital, but the short-term speculative capital betting on rupee appreciation would be reduced. Further, concerns about job losses in export sectors such as automobile parts, textiles and leather could be addressed by giving direct compensation to workers and meaningful retraining programmes. Not only would it prevent distorting the entire Indian economy in order to be geared to supplying the US consumer with cheap Indian goods, even the costs of these programmes would be lower than the fiscal cost of this policy today.

Actually, a stronger rupee would help some exporters to the extent of reducing the cost of imported goods. With reduced forex intervention, sudden and sharp hikes in interest rates that affect everyone, including exporters, would be avoided. So even the impact on total exports may be less than what it may appear at first blush. A stronger rupee and a stop to the huge liquidity injection through forex intervention, will pull down consumer price inflation. The US economy may continue to see turmoil for some time. We do not need to import its turmoil into India by pegging the rupee to the US dollar.

- Indian Express