Nri Investment: India Or Usa?

Non-resident Indians (NRIs) often face a dilemma when it comes to deciding whether to invest in India or the United States. On one hand, India offers higher bank interest rates, more scope for growth in its developing market, and better liquidity. On the other hand, the US market boasts well-known companies, a stronger currency, and a historically better-performing market. NRIs must also consider factors like regulatory policies, repatriation rules, and tax laws in both countries.

Indian equity returns surpass US indices, even after adjusting for rupee depreciation

Indian equity returns

Indian equity returns have consistently outperformed US indices over a 20-year period, according to a study examining rolling 3-year returns. This trend holds true in both rupee and dollar terms, and even when adjusted for risk. Notably, the Nifty IT index has performed on par with the NASDAQ 100. This highlights the resilience of Indian benchmark indices to exchange rate volatility.

Impact of rupee depreciation

Rupee depreciation refers to a decrease in the value of the Indian rupee against the US dollar. This can be influenced by various factors, including interest rate differentials, trade balances, speculative currency trading, and inflation rates. While rupee depreciation can impact certain sectors, such as IT, exports, pharma, and petroleum, it can also benefit export-led industries.

Investment opportunities for NRIs

Non-Resident Indians (NRIs) have shown a preference for keeping their savings overseas while viewing India as a destination for higher returns. A survey by SBNRI, an NRI-focused fintech platform, found that 53% of NRI investors believe India provides better returns than other countries. India's economic growth and market stability are attractive to NRIs, with sectors such as mutual funds, fixed deposits, and commercial real estate being popular investment choices.

Factors to consider

When deciding whether to invest in India or the US, it's important to consider factors such as bank interest rates, regulatory policies, currency conversion costs, market maturity, and liquidity needs. India offers higher bank interest rates and provides easier access to regulatory information. However, investing in the US can be a hedge against the rising dollar and offers access to well-known companies and geographical diversification.

Indian equity returns have consistently outperformed US indices, even after adjusting for rupee depreciation. This, coupled with India's promising economic outlook and transformation, makes it an attractive investment destination. However, it's essential for investors to carefully consider their investment goals, risk appetite, and the specific opportunities available in both countries before making a decision.

Regulatory policies: the US market is heavily regulated and favours US citizens

The US market is heavily regulated, and while this is done with the aim of protecting citizens, it can also make it harder for non-citizens to invest. Regulatory policies are designed to protect individuals and the environment, but they can also negatively impact people's ability to innovate and serve their communities.

In the US, regulations are implemented at the federal, state, and local levels. Federal regulatory agencies include the Food and Drug Administration (FDA), which maintains food and drug quality standards, and the Environmental Protection Agency (EPA), which works to reduce environmental impact. Regulations may be implemented to control the forces of supply and demand, determine who is allowed to enter a market, and set prices.

The regulatory process can be lengthy, taking anywhere from several months to several years. It involves evaluating potential rules, providing a forum for public review, and proposing a final rule. This process is governed by the Administrative Procedure Act (APA), which establishes how federal agencies formulate, amend, and repeal rules.

While regulations are necessary for maintaining order, standards, and safety, they can also hinder entrepreneurship, economic growth, and employment opportunities if not properly balanced. The US regulatory system can be challenging for non-citizens to navigate, and the favouritism towards US citizens may be a factor for NRIs to consider when deciding whether to invest in India or the US.

Bank interest rates: India offers higher interest rates than the US

When it comes to investing, one of the key factors to consider is the potential return on investment (ROI) in the form of interest rates. In this regard, India offers a compelling proposition for Non-Resident Indians (NRIs) as it boasts higher bank interest rates compared to the United States.

Higher Interest Rates in India

India's bank interest rates can go as high as 8%, and even higher for senior citizens, depending on various factors and the bank in question. For example, Unity Small Finance Bank and North East Small Finance Bank offer interest rates of up to 9% per annum. On the other hand, in the US, interest rates are typically much lower. This means that NRIs can benefit from higher interest earnings on their investments in India compared to similar investments in the US.

The Benefits of Higher Interest Rates

The higher interest rates in India can be advantageous for NRIs looking to grow their savings and investments. This is especially true for those who are seeking to maintain ties with their home country. By investing in Indian banks, NRIs can potentially earn higher returns on their deposits, which can lead to greater wealth accumulation over time.

Diversification and Risk Management

However, it is important to note that investing solely based on higher interest rates may not be advisable. A wise investment strategy involves diversifying one's portfolio across different asset classes and geographies to minimise risk. As such, NRIs may consider investing in a combination of Indian and international markets to balance their portfolio.

Regulatory and Currency Considerations

Additionally, there are regulatory and currency risks associated with investing in any foreign country, including India. NRIs should be aware of the challenges posed by regulatory approvals, foreign investment restrictions, fund repatriation, and currency fluctuations. To mitigate these risks, some NRIs invest in Indian stocks or funds denominated in their home currency or hedge through forward contracts or currency options.

While India's higher bank interest rates present an attractive opportunity for NRIs, it is crucial to consider all factors and consult expert financial advice before making investment decisions. A well-diversified portfolio that takes into account personal circumstances, risk tolerance, and long-term goals is generally recommended.

NRIs face challenges when investing in India, such as regulatory approvals and currency risks

Non-Resident Indians (NRIs) face a number of challenges when investing in India, including regulatory approvals and currency risks. Here are some of the key issues they need to navigate:

Regulatory Challenges

NRIs must navigate a complex web of rules and regulations when investing in India. They are required to convert their Demat account into an NRE or NRO account, and stock trading activities must be routed through a Portfolio Investment Scheme (PIS) account. The rules related to NRI investments in India can change, and it is the responsibility of the investor to stay updated.

In addition, there are restrictions on investments. For instance, due to the Foreign Account Tax Compliance Act (FACTA), only a limited number of mutual fund houses in India accept investments from NRIs based in the USA and Canada. This is because of the increased paperwork and compliance requirements that come with receiving investments from these NRIs.

Furthermore, NRIs looking to start a business in India face additional regulatory hurdles. For example, they must have a physical office and be physically present during the incorporation process. They also need to have a local address for a registered office in the country, which can be challenging for those living abroad.

Currency Risks

Currency fluctuations can significantly impact the investment returns of NRIs. Since their investments in Indian mutual funds are typically denominated in Indian Rupees (INR), while they may earn and spend in another currency, they are exposed to exchange rate risks. A depreciating INR can result in lower-than-anticipated returns when funds are repatriated or converted into their home currency. Conversely, an appreciating INR can lead to higher-than-expected gains.

To mitigate currency risks, NRIs can diversify their investments across different asset classes and currencies. They can also explore mutual funds that offer currency hedging to lock in exchange rates and protect their investments from potential losses due to currency movements.

Tax Implications

Tax liabilities for NRIs investing in India can be complex and vary depending on the tax laws of both India and the NRI's country of residence. NRIs may face double taxation, where they are taxed on their investment income in both India and their country of residence.

To alleviate this burden, India has signed the Double Taxation Avoidance Agreement (DTAA) with over 90 countries. This treaty helps to reduce the impact of double taxation, allowing NRIs to pay taxes in either of the two countries.

Limited Diversification

NRIs often invest in traditional fixed-return assets in India, such as bank fixed deposits, gold, and real estate. However, this lack of diversification across asset classes can impact their overall investment returns. While there are multiple investment avenues available, such as NCDs, direct equity, IPOs, ETFs, and mutual funds, NRIs may be hesitant to explore these options due to regulatory complexities, transactional compliances, and a lack of knowledge about the Indian market.

India's economic growth and global position create attractive investment opportunities

India's economic growth and global position have created attractive investment opportunities. The country's rapid growth across multiple sectors has reduced market volatility and created a stable environment for investors. Here are some key factors that make India an attractive investment destination:

Strong Economic Growth and Rising Global Position

India has consistently been one of the fastest-growing major economies in the world, with an average annual GDP growth rate of 6% to 7% since the start of the 21st century. In recent years, India's GDP growth has outpaced that of China, making it the fastest-growing major economy. This strong economic growth provides a favourable environment for investors, offering potential for significant returns.

Diverse and Growing Sectors

India's economic growth is driven by diverse sectors, including services, manufacturing, agriculture, and construction. The services sector, which includes IT, outsourcing, and financial services, has been a major contributor to GDP growth and remains the fastest-growing sector. The manufacturing sector is also expanding, with India becoming a global hub for industries such as mobile phones, automobiles, and pharmaceuticals. The agricultural sector, while declining in share of GDP, remains important and is benefiting from technological advancements and increased investment.

Favourable Demographics and Domestic Consumption

India has the world's second-largest labour force, with a large and growing population that drives domestic consumption. This provides a strong foundation for economic growth and offers a vast market for businesses operating in the country. Additionally, India's large and diverse consumer market presents opportunities for companies in various sectors, including retail, e-commerce, and consumer goods.

Investment-Friendly Initiatives

The Indian government has implemented numerous investment-friendly initiatives, such as the Make in India campaign, which aims to boost local industries and encourage foreign investment. The country has also made significant progress in improving the ease of doing business, rising in global rankings in recent years. These initiatives create a more conducive environment for investors and entrepreneurs.

High Interest Rates and Favourable Currency Dynamics

India offers relatively high bank interest rates compared to other countries, including the US. This makes it an attractive destination for investors looking to earn higher returns on their savings. Additionally, the depreciation of the Indian rupee against the US dollar can provide benefits for foreign investors, particularly in sectors like real estate.

Robust Financial Markets and Investment Opportunities

India boasts robust financial markets, including some of the world's largest stock exchanges, such as the Bombay Stock Exchange and the National Stock Exchange. The country offers a wide range of investment opportunities, from mutual funds stocks to real estate and startups. Indian stocks, in particular, have been growing steadily over the past two decades, providing potentially lucrative returns for investors.

Frequently asked questions