The global capital and currency markets have been volatile for last the few months, also triggering serious turbulence in the rupee. The current account deficit and the fact that foreign institutional investors are selling heavily on the Indian bond market have been the key triggers for the rupee's repeated depreciation. Factors such as negative export and industrial growth have triggered even more uncertainty, specifically in the currency trend pattern.
The key question is will the rupee see a further depreciation? Parliament has passed the Food Security Bill, which effectively increases subsidy burden for the government.
The fact that the Lok Sabha elections will be held in in 2014 may be cause for more of such populist measures — nevertheless, the country's overall financial status does not look very exciting right now. We may continue to see volatility over the mid-term.
NRIs and the real estate market
When it comes to Indian real estate, the non-resident Indians (NRIs) take centre-stage when the rupee depreciates. The foreign exchange that they tend to funnel into the sector increases significantly when the rupee slides. In times of rupee volatility, banks institutions and developers tend to announce various schemes aimed at attracting NRIs.
At the same time, they are also attracted to the higher interest rates on NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) deposits, as the standalone rupee returns look quite lucrative to them.
Paradoxically, data covering the last two decades indicates that NRIs have, in fact, been losing out when they funnelled their foreign exchange into such accounts during such volatile times. They have erroneously assumed that they are capitalising the rupee's volatility by locking into high yielding deposits. However, this route has caused them to miss out on overall capital returns, because the perceived benefits of high interest rates are actually eroded by the depreciating rupee.
It is therefore wrong for NRIs to assume that they can earn good returns by locking their foreign exchange into high-yielding deposits. The reason why more and more NRIs are choosing to invest in Indian real estate instead is because they are now aware that this is the only route that assures them of optimal benefits.
As long as they maintain a broad investment horizon and have chosen their properties well, the capital appreciation on real estate translates into multi-fold that put all other asset classes in the shade.
Traps on the path
NRIs have always been soft targets for hyped-up real estate marketing by developers. The objective of such marketing is to make them believe that the projects being offered have been specially created for them — that are not standard offerings on the market. Projects being marketed directly to NRIs are trumped up as the best options that money can buy in India.
The fact is that most of these projects are not professionally managed, which has extremely negative implications for someone who is not physically present in India. Lack of proper project and facilities management results in accelerated dilapidation of neglected units, and security also becomes an issue. There are often no provisions for paying society dues from abroad.
Likewise, NRIs who have made a sentiment-driven property purchase in their home towns in India, often overlook that paying dues such as property tax online may not be an option in these locations. The end result is that the property turns out to be a depreciating and legally compromised money trap.
For these and many other reasons, NRIs should not give in to sentiments or manipulative marketing while making a decision on buying property in India. Such decisions need to be based on sound advice from professionals, with the objective of reaping good returns on investment.
For NRIs, the Indian real estate market definitely holds the highest possible investment potential. However, no such investment should be done on impulse, and it is at all times advisable to maintain a healthy long-term investment horizon of between 7-10 years.
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Good thoughts.
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