NRI’s (Non Resident Indian) Depositors To Lose Heavily Due to USDINR Plunge

Almost all Emerging Market currencies have plunged in recent months due to Trump’s tantrums.

However, no other country does as much aggressive marketing to collect deposits for it's insolvent banks from it’s overseas diaspora as does India.

Hence, the biggest losers in Asia’s worst performing currency for 2018 (USDINR) are obviously the NRI’s.

Bankers being bankers keep “advising” clients that USDINR will appreciate, despite the fact that for over 50 years, USDINR has been depreciating at a rate of 5-6% pa.

This time the plunge is deeper and has crossed the psychological/technical/fundamental level of 70 and closed above this level on Friday weekly chart as well as for the month end of Aug 2018.

This is quite ugly for the next few months because Indian Govt is also running tight on it’s reserves and has burnt about USD 30-40b in the last few months while their banks are at the precipice of a collapse and are also shutting overseas branches in a hurry due to multiple frauds and have the highest Non Performing Assets in the world while dozen banks have halted ALL lending.

Last Aug 2017, USDINR was stable around 63-64 level. 

Today it is at 70.50-71 level.

How this investing in INR to get a higher return while booking a forward contract of 1 year ahead works, is that the bank will leverage (give a loan) of 5-6 times on a sum of money.

Since the forward rate is booked, so the banker advises client to take advantage and pay the bank a USD loan interest rate of 2.5-3% pa on USD on the 5-6 times leverage, convert entire sum (both equity and loan which is now 5-6 times more than the original equity amount) into INR (where client carries the risk should the USDINR breach the forward contract level). 

This is where it gets tricky and most clients do not understand, partly because it has not happened before (but that does not mean that it will never happen).

Assume, client books a deposit when rate is 63.50 in Aug 2017.

Banks typically book the forward at about 10% level else it is very expensive. When markets are favorable, the forward rate is low because EVERYONE believes that the FX rate cannot plunge as much or might appreciate (since they believe the fake data coming out of the Govt).

Fast forward to Aug 2018, the USDINR is closer to 71 and has breached the 10% level of 69.85.

Then, all hell breaks loose.

Because suddenly, this conservative depositor is called by the bank and told that 40% to 70% of his/her principal amount is gone because the 10% level has been breached and there is a loss and he/she needs to pay a margin call. 

This loss depends on what USDINR rate was used at inception, what USDINR was the forward contract for and what is the USDINR rate today. This will vary at all banks, depending on their views and how they structured these risky products.

Such deposits cannot be broken or prematurely withdrawn until the maturity date except with a more heavy loss.

Interest must be paid to the bank on the borrowed amount of 5-6 times, FX forward rate must be paid to the bank for hedging plus a premium on both (profit for the bank). 

Basically, the banks are fully secured and the entire loss belongs to the customer who never understood how this risky leveraged product works in the first place.

Loss can be anywhere from 40% conservatively to 70% aggressively on the capital, plus the interest lost. 

If the client was unlucky and the bank took a higher margin or the inception FX rate was lower or forward hedge was less than 10%, then the loss can even exceed the capital during the last 1 year time frame.

If the USDINR does not stop plunging, it will cause mayhem in India because for the next several months, investors will not do these super high leveraged products and thus Indian Govt will not have the luxury to indulge in showing their fake data of "leveraged" inward remittances and reserves. 

All of which is coming leveraged for several years so when it leaves it leaves also in a very big hurry.

Whoever believed in the fake India growth story and invested in higher interest rate "safe" "bank" deposits (with leverage) will lose heavily in these “deposit” products.

You can read more here from the media in Dubai:

NRI investors in deposit products stand to lose heavily from rupee decline

We would like to hear your views or experience (if any) on this and welcome you to leave your comments.