Deep Singh

Here is one for Rannoch/Rhino/Suresh/Pete95, others....

Indian banks (in India of course) are offering over 9% compound interest on deposits. Inflation rate there has hit a 2 year high of 6%. If one were to take money from here and deposit it there with a view to bring the money back here again is it a good deal? Or in other words what is the real rate of return?

Currency fluctuations need to be taken into account, as the rupees will be changed back into gbp. Please see the rather disturbing link below.

Thanks.



RUPEE VALUE, COMPARISION OF GOLD V/S FCNR $ DEPOSIT, NRI, NRI Account, NRI Services, Bank in India

KiwiGTI

I don't know how practical it is but that's how a lot of banks make money. Borrow in Japan where interest rates were essentially 0% and invest it in a country that pays a lot more. It's guaranteed money.

GCollier

You won't be able to make any money doing what you suggest unless you're prepared to take on the exchange rate risk, and the exchange rate works in your favour.

If, say you bought £10,000 worth of rupees today and hedged your FX risk by buying a forward contract to convert your rupees back to £ after a year at an agreed price, you'd end up with the same amount of money you'd have got from investing your £ in the UK (actually less as buying the forward and paying commission on your currency exchanges would cost you money).

Gary.

Trout

iTrader: (1)

If you want to make currency investment Swiss Franc, Canadian or New Zealand dollars are the way to go.

The answer to your question is in the data you give.

In simple terms returns are 9%. However inflation of 6% tells us that the money is expanding by 6% per year. So another way of looking at that is that currency is devaluing by 6% per annum.

9 - 6 = 3% real return.

However it is not quite as simple as that as 'sentiment' plays a significant role and currency matching is not a fixed system.

What that means is that the exchange rate is not based directly on inflation or devaluation today, it is based on what might happen in the future. A great example of this is the US dollar. If you check it out you can buy a lot of dollars for the pound nowadays. (2!!).

As the US defecit has grown that in itself has been OK - the reason the currency has devalued is that investors do not think that the US has a credible plan for paying it off.

The three currencies mentioned above have given by far the best investment return over the past 100 years, included properties and equities (taking into acccount currency value).

If you want to invest in India there are far better ways of doing it. My tip is CTS (quoted in the US) one of the real comers amongst the Indian companies.

Try that, or China.

Rannoch

Suresh

Not only do you have exchange rate risk (Market Risk), as stated above, there is also a chance (Country Risk) that the Indian Government changes the rules and won't let you repatriate your investment. Malaysia did this during the Asian crisis in 97/98 for example and investors had to wait a year before being able to sell MYR. There is also the risk that the commercial bank taking your deposit absconds with it and goes bust (Credit Risk).

A 3% real return isn't really sufficient reward for such risks IMHO.

mart360

I recall back in the early eighty's, i was drinking in a bar on a cruise ship with a guy from Switzerland. he was buying his drinks with swiss francs, and getting his change in danish krone, he was effectively getting his drink free, and change to boot!, he claimed the krone he got back, was more than the worth of the swiss franc... never found out if it was true though...

surely if it was that simple, then everybody would be doing it?

Mart

Suresh

That would only work if the cruise ship company were quoting a wrong exchange rate that effectively overvalued the CHF. i.e. his gain was their loss.

I expect the buenzli was just drunk and had no idea whatsoever

mart360

Most likely, we were certainly tanked too


Mart

Petem95

I'm currently looking at Investment Trusts as an easy way to invest in rapidly growing economies where I want to put my money (ie Brazil, China, India, Russia) as this seems like a safer and easier option.

Investing 10k pounds in JPMorgan's Indian Investment trust over the previous 5years would have given a return of over 35% per year for example, so you'd have 45k now.

One of the best performing trusts over the last 5years has been Blue Planet Investments (Edinburgh based). 10k invested with them 5years ago would now be a staggering 145,000k - however chances of that repeating over the next 5years is probably extremely slim.

Has anyone else gone down the Investment Trusts route? The other advantage is you can essentially wrap them in your 7k ISA share allowance, so tax free (up to that limit of course).

Deep Singh

Firstly, apologies if I'm a bit slow with this stuff.

The return is only 9-6 if the money were to stay in India and spent there isn't it? If I were to bring that money back here it shouldn't make any difference to me what the inflation rate there is? Am I right on this?

There is a currency risk of course.


I'm not interested in funds/trusts etc. For each one that has returned decent growth there are ten that have done zip, or lost you money. There are plenty that underperform the benchmark trackers of those countries even when there is an equity/property boom. Even if they drop in value by 50% the *******s still take their full management fees, sorry thats a no deal for me thanks.

Tbh, I can invest directly in India as I have the advantage of speaking the lingo and having family there, it holds no fear for me. I actually have already invested there in a property deal that has made me a few quid.

The question is should I bring the money back here and get 5% gross on it and pay 40% tax or have a punt and leave it in India getting 9% virtually net.

If my statement above about inflation is correct then the only risk I can see is the currency risk. Can anybody tell me whether there is anyway of finding out which way rupee to £ ratio is predicted to go?

Many thanks

Trout

iTrader: (1)

Currency risk is specifically related to inflation when you bring it back.

IF (and this is the big complex IF) the original currency stayed at the same value, the rupee which has devalued by 6% will now buy 6% less of the original currency at the end of each year. Inflation is a key factor dictating exhange rate as it reflects the devalutation of a currency. So you will lose out when you repatriate the money.

At the moment the dollar is 'devalued' by huge trade defecit and debt so sentiment is against it. So more than just inflation affects exhange value.

I have had dollars invested in the US for the past 18 months and the decrease in the value of the dollar has more than wiped out my returns.

Deep Singh

Thanks. So if currency x stays constant and there is 6 % inflation in country with currency y, then after one year y buys 6% less x?

Suresh

Theoretically if everything else remains equal, then yes. However it never does in reality.

I had an old colleague (phD) at UBS who was tinkering with neural networks to trade FX. The idea was to find inputs that could be used to predict the market. He was doing it for real with a USD 1Mio position in the market and had around 200 different information inputs and a rather powerful Sun workstation to tell him what to do. Finally he had to admit that exchange rates are stochastic proceeses and cannot be reliably predicted.

The GBP-INR 1yr implied volatility would be a good indicator of how much the (option) market expects the spot rate to move in the next 12 months. The skew would even tell you whether puts or calls are favoured (25 delta risk reversals) if the market in this pair is liquid enough.

Other than that taking a punt on exchange rates is just gambling

TopBanana

I had a look at this too. Interestingly, certain combinations of indicators were quite profitable if you look at historical data (without curve fitting!), but the market has become more efficient as people have uncovered them!

Deep Singh

Suresh could I be cheeky and ask you to look at the GBP- INR 1yr volatility thing? I really don't understand it!

Suresh

Deep I'll check our systems and/or Reuters for you tomorrow. My new year's resolution was not to post on SN from work anymore, so I can't give you an answer for 24 hours, I'm afraid. Last year I managed it for almost 3 months

The 1 year implied volatility is the maximum percentage that the market currently thinks the spot rate will move by in the next 12 months. It sounds odd, but implied vol is what option traders deal in, as though it were a commodity in itself. Implied volatility is a mix of historical volatility, current volatility and expected volatility. I believe 12 month EUR-USD hovers around the 7% mark at the moment. During the asian crisis in the late 90's some of the exotics were trading at 30%+. I would expect GBP-INR would be around 10%+ now (I use ISO currency codes, as my Dutch keyboard doesn't do the pound symbol) Will let you know tomorrow.

fpan

iTrader: (11)

First of all hello to everyone as this is my first post
Why would you have to pay 40 per cent tax importing money to a country? Isn't it only the interest that's getting taxed?

Thanks,

Deep Singh

Suresh, thank you very much. There is no rush, whenever you have time.

Fpan, yes I meant on the interest.

Suresh

Deep, I finally dragged myself to a Bloomberg terminal today and looked up GBP-INR FX volatility. The one year vol is trading at 6.50 - 9.00 with 25 delta risk reversals being quoted calls over in 7 tenths.

In English this means the market currently expects the spot rate to move in a bandwidth of around 8% in the next year and the pound is likely to rise against the rupee. I'd demand a higher return that you are being offered for that sort of risk.


If for whatever reason you want to know more about leptokurtotic distribution, fat tails, skew, smile and that sort of thing, this is a good article: http://www.gfmi.com/Instructors_corn..._Reversals.pdf

Longjing

I bought JPMF India a few years ago. About 3x money now. I also bought their Japan fund thogh, and that's off 15% ish last time I looked.

Are there not still foreign controls in India? Tbh I don't see it as a market for the casual investor.

Deep Singh

Thanks Suresh!

I'll stick the money in another property there instead. The last one went up 60% in 12 months!