How to capitalize on the 8.75% Fixed-term Deposit in India?

[PharmingFIRE]

Hello All,
I am a long time lurker and have been obsessed with dreams of ER. My wife is Indian (now US citizen) and on a recent trip to visit the inlaws I saw that the Indian equivalent of "CDs" are paying almost 9% interest. That seems amazing to me. I have asked here in the States about investing in India and have gotten at best "I don't know" and in India I could not get a confident answer either. What I want to know is: How do I capitalize on this rate in India? What are the tax implications? How do get the money/interest back to the US? And, importantly, what if anything am I missing?

I would love to hear from Indian-Americans with some experience with this!
Thanks!
FR

 

[samclem]

And, importantly, what if anything am I missing?

I don't know if you are missing it, but you didn't mention exchange rate risk. If the rupee suffers devaluation due to inflation relative to the dollar or other factors make the US dollar appreciate against the rupee, and if your spending is in dollars while your assets are in rupees (sitting in that Indian CD), you could very well find yourself losing money even with 9% rates there.

Ask yourself why the sellers of these notes have to offer 9% to get people to invest in them.

Take a look at the long-term trend in the value of the rupee vs the USD.

If the world economy re-enters a slump, ask yourself if investors will flock to rupees or USD as a means to preserve their capital.

 

[Animorph]

Try Everbank and see what they have for Indian CD's. That would be the easiest approach since it is all based in the U.S.. Check the monetary history and expectations. The 8.75% won't do you any good if the exchange rate goes significantly against you.

 

[MichaelB]

Hello All,
I am a long time lurker and have been obsessed with dreams of ER. My wife is Indian (now US citizen) and on a recent trip to visit the inlaws I saw that the Indian equivalent of "CDs" are paying almost 9% interest. That seems amazing to me. I have asked here in the States about investing in India and have gotten at best "I don't know" and in India I could not get a confident answer either. What I want to know is: How do I capitalize on this rate in India? What are the tax implications? How do get the money/interest back to the US? And, importantly, what if anything am I missing?

I would love to hear from Indian-Americans with some experience with this!
Thanks!
FR

Very high local currency interest rates are common in developing countries. As the others have pointed out, you have an exchange rate risk that is difficult to project.

Usually, to get these rates one must have local financial accounts. That might be possible if your wife still retains Indian citizenship. The interest would be subject to US income tax.

 

[samclem]

Over the last 5 years the INR lost 38% of its value against the USD. Also, rememember that your savings also have to "beat" US inflation, so after you account for any currency effects you also have to subtract any USD inflation losses to arrive at the real growth of your money.

Here's a web site for looking at historical exchange rates. Historical Exchange Rates | OANDA

If you do this, you probably shouldn't think of it as a "safe", non-volatile investment (like a US CD). It's primarily a bet in foreign exchange rates.

 

[PharmingFIRE]

Thanks for all the input

Thanks for all the input and perspective.
We have rupees there now (her previous savings) so wonder if this investment vehicle should be limited to those funds and collect the interest in USD. Or would it be better to transfer/convert the rupees to USD and invest here? 9% still seems so tempting.

 

[haha]

You really would have to study the situation and make a decision about possible direction of rupee/USD. I think it was in 1994, a popular play among many Americans was opening Mexican Savings accounts, since the Peso was pegged to the USD and their interest rates were much higher.

It worked until it didn't any longer. Mexico made a large devaluation, as I remember on a Sunday night, and many Americans immeditately lost whatever they had made in extra interest, and much more.

Ha

 

[samclem]

We have rupees there now (her previous savings) so wonder if this investment vehicle should be limited to those funds and collect the interest in USD. Or would it be better to transfer/convert the rupees to USD and invest here? 9% still seems so tempting.

I don't know about the tax/customs. etc implications of importing her money to the US. The two biggest questions I'd have:
1) Do you expect your eventual spending to be in rupees or dollars? If it's to be in rupees then some people would suggest that there's a case to be made for holding some portion of your investments in rupees to insure against a big jump in value of the rupee against the dollar.
2) Why focus on India? Vietnam government bonds are over 9%, Ukrainian government bonds yield over 18%, etc. Prudence would suggest you consider the same issues before investing in Indian CDs, govt bonds, etc as you would apply before investing in any other country.

 

[nun]

If you invest in India and meet the account value thresholds you must file US FBAR and 8398 forms. Also you must carefully determine the nature of the Indian investments. If they are CDs or a savings account that only produces interest then you'd enter all gains on Schedule B. If they are anything other you could be getting into PFIC and foreign trust issues which are to be avoided.

 

[Throwdownmyaceinthehole]

Evergreen would be the easiest way. I've got some money in Aussie bank account - earning 5% - but I've seen the exchange rate fall from 1.05 to .94 and then climb back up. I'm not willing to take the risk and we want to keep our investments nice and tidy. Would also have to pay Aus income tax. We are moving next month and I am planning to repatriate the funds.

 

[scrinch]

Raider, find out what the interest rates are on dollar-denominated CD's in India. Then you'll get an idea of what risk the banks assign to holding rupees relative to holding dollars. Here in Indonesia, a rupiah-denominated CD earns about 5% while at the same bank a dollar-denominated CD earns 0.5%. The difference is largely related to the bank's perception of currency risk.

 

[DesiGirl]

If you want to avoid currency risk, FCNR is the product u are looking for but off-course rates are lot lower.

ICICI Bank | NRI

You can take your money back with NRE and FCNR . I'll repeat what has been said already if you need to spend in India in Rupees look at these FDs (will still get 8.75% was 9.5% few days ago) otherwise currency risk is too high. If you want exposure to Indian Market you could consider funds like IFN. India is essentially high growth high inflation high risk environment.

On a side note Ask your wife to get OCI (Overseas Citizen of India - it won't be dual citizenship) or PIO (Person of Indian origin) card so you can use India for cheaper medical facilities or very inexpensive college education for kids with special seats assigned for NRIs (Non Resident Indians) if needed.

Thanks,
DesiGirl