Mumbai and New York - The patriotism of wealthy overseas Indians has helped the country avert economic crises in the past and it is little surprise that embattled policymakers are turning to them again to plug a record trade gap that is battering the rupee.
This time, though, big investors among the more than 25 million strong overseas Indian community – the second-largest diaspora – are staying away as the economic outlook darkens and political instability looms ahead of national elections.
Shoring up inflows from overseas Indians is a key weapon in Finance Minister Palaniappan Chidambaram’s arsenal to prop up the rupee, which has lost 20 percent against the dollar this year and dropped to a record low on Wednesday.
The rupee’s crash has boosted remittances, mainly from blue-collar workers overseas – particularly in the Persian Gulf – who can get more rupees for hard currency. However, it has not triggered a surge in high-value investments in real estate, private equity funds and stock markets, bankers and wealth managers say.
Underlining the hesitancy, flows from non-resident Indians into bank deposits in the quarter to June fell to $5.5 billion (R57bn) from $6.6bn a year earlier, central bank data show.
Investments in property by overseas Indians dropped about 30 percent in the fiscal year to March, according to the Confederation of Real Estate Developers’ Associations of India, an umbrella group of local property developers.
“People feel like there are too many unknowns. The most recent government has been ghastly, and nobody knows what comes after it. I haven’t been optimistic about India for a while,” said Vasant Prabhu, the chief financial officer of Starwood Hotels & Resorts Worldwide in New York. “What makes it hard [is] you don’t know what the bottom of the rupee is.”
His comments were underscored by a currency that stumbled from 63 rupees to the dollar on Friday to almost 69 on Wednesday – a sharp move over such a short period.
Wealth managers and bankers in the UK, the US and India agreed, saying non-resident Indian clients saw too many uncertainties despite the tantalising prospect of buying assets with a record low rupee.
Economic growth is at its weakest in a decade and slowing further. New Delhi is struggling to close a record deficit in the current account and a national election that must be held by May next year could tempt the government to spend to win voters, undermining its fiscal discipline.
In addition, emerging markets are losing favour with investors as the prospect of the US Federal Reserve reining in its economic stimulus draws cash into US assets.
In a bid to attract funds, India liberalised bank deposit schemes and some banks raised interest rates for overseas Indians this month. They could secure interest rates of more than 8.5 percent on one-year rupee deposits and as much as 10 percent on three-year accounts, a relatively high return compared with many other countries where rates remain near historic lows.
India was the top recipient of remittances from diaspora last year with about $70bn, followed by China at $66bn, World Bank figures show.
But many investors are staring at losses as the rupee’s plunge since May has wiped out investment gains made in the past few years. The rupee has fallen more than 30 percent since 2011.
“All these folks always had this strong belief that India is the safest country to invest in, and four, five years back when the rest of the world was collapsing, India was still growing,” said Anish Behl, the head of wealth and strategy at IndusInd Bank, referring to the global financial crisis. “That mood has changed. Some non-resident Indians are looking at dollar-based products from international stables… they are wary of pure rupee products.” – Reuters