Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.
An NRI (Non-Resident Indian) in the US has several choices to invest: in the US stock market, in the Indian stock market, in funds in either place, in real estate in either place, in gold, commodities, foreign currencies.
In order to make the right investment choices, the investor should understand the following facts about the US and India.
1. The indian rupee has been strengthening against the dollar.
This means that the number of rupees to a dollar has been decreasing in recent times.
The exchange rate is currently around 39.6 rupees to the dollar. This chart shows the drop in the last five years. Especially note the steep drop in 2007 from around 44 to 39.6.
What caused this trend? (See http://economics.about.com/cs/money/l/aa022703a.htm for a great overview of exchange rates and what causes exchange rates to vary). There are several factors in the rupee dollar trend:
a. The PN problem:
Foreign Institutional investors (FIIs) are allowed to channel investments from individual investors in their country anonymously into the Indian market, using a mechanism called Participatory Notes (PNs).
Recognizing the potential of the Indian stock market, huge fund inflows from such investors, through FIIs, have been pouring in. In order to buy indian securities, foreign investors need to get Indian Rupees in exchange for dollars. This high demand for Indian Rupees and excess supply of dollars caused the rupee to strengthen against the dollar.
b. The Indian stock market has been growing at a rapid pace:
The Sensex, India’s key stock index, has grown from 7000 in Jun 2005 to 21000 in Jan 2008 (see ). This has also led to a demand for Indian rupees, to buy shares in the Indian stock market as opposed to other choices, causing the rupee to strengthen vis-à-vis the dollar.
c. The US stock market has been falling in the last few months. This causes US investors to sell dollars and invest them in other economies. This surplus of dollars in the market also leads to the weakening of the dollar.
d. The real estate market in the US has been falling.
This further weakens the dollar, as US investors look elsewhere to invest their money.
All these factors together have caused the rupee to strengthen relative to the dollar.
2. The Indian stock market has been growing rapidly in the last three years, and a correction is beginning to happen.
As you saw, the Sensex has grown threefold in the last three years (7000 in June 2005 to 21000 in Jan 2008), but it has dropped 5000 points to 16630 from Jan 8th to Feb 11th 2008. This drop was triggered by a combination of recession fears in the US, overestimation of the quick money potential of the Reliance Power IPO by FIIs and the consequent disappointment in the Indian stock market.
Expert predictions range, as usual, from the market reaching back to 4 digit figures, to rebounding at 15000 to already beginning to turn around. That pretty much means anything can happen – but, there seems to be consensus that it is unlikely to see astronomical growth as seen in the last few years.
3. Gold has seen significant growth in the last year: This is a common situation in turbulent economic conditions. However, gold (in rupees) has had almost consistent growth in the last thirty years.
4. Real estate boom in India is also beginning to plateau out:
The BSE realty index launched in mid 2007, is an indirect indicator of the real estate trends in India. It shows that real estate grew till end 2007, and began sliding down slightly from January. This was to be expected, as land and housing costs were growing astronomically. See, for instance, an excellent explanation of why renting makes so much more sense than buying an apartment in Bangalore.
5. Fundamentals of Indian stock market are strong compared to the US stock market.
Real GDP Growth rate
US - 1.9%
India - 8.4%
Inflation
US - 2.3%
India - 4.4%
Current account balance : This is the sum total of money received versus spent through import/export, transfer of fund between residents and non-residents.
US = -788.293 billion USD
India = -32.301 billion USD
In the next part, we will look at the different investment avenues available to the individual US NRI investor, and analyze the pros and cons.
Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.
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