USD INR interest rate Arbitrage - a practical example

[husaisa]

I was playing around with the disconnect between the FX rates and Interest rates in the USD INR markets. Seems like an arbitrage opportunity does exist. Basically I am taking a loan in USD (5X1 ARM @ 2.82%) and putting the proceeds into simple bank CDs in India. After the first 60 months roll off, I simply convert back to USD and pay off the remainder of the loan. My only exposure is the USDINR FX rate, which I may or may not choose to hedge - even if I consider the 1 percentile move it seems I will still be in the money. The highest 5 year CD yield at present is 2.43%. This will beat that very easily. Am attaching a sample calculation.

Amt borrowed INRUSD today 45 $ 250,000.00 INRUSD 10 yr low 39 INR 11,305,000.00 INRUSD 10yr high 52
Best CaseNowWorst CaseUSD INR at
38 45 52INR payable at end INR 8,430,634.02 INR 9,983,645.55 INR 11,536,657.08 Total INR paid as installments INR 2,372,499.60 INR 2,809,539.00 INR 3,246,578.40 Total inward INR INR 17,394,143.81 INR 17,394,143.81 INR 17,394,143.81 Net Profit INR 6,591,010.19 INR 4,600,959.26 INR 2,610,908.33 ROR %11.66%8.14%4.62%

I know Merill used to sell this carry trade in USDJPY back in the day. Not sure if we have something like this on USDINR....
Do opine... seems like a 4% arbitrage (worst case) for free.....

SH


PS - Sorry guys the formatting is off... I was not able to upload the file either as I am behind a firewall Email me and I will send the file over.

[vishaldos]

Hi

Can you email me your spreadsheet with that practical example.

I am in India. How can I get a $ loan from US? I can hedge the currency risk at the local currency exchange.

Pls do reply

Rgds
Vishal

[samv]

You seem to be aware of the FX risk in this carry trade. Let me point you to another issue. The very high rates (~10%) on Indian CDs that you can get, are typically for NRO/NRNR accounts. This NRO money can not be repatriated back to USA legally. If you stick to NRE accounts (which you can repatriate legally) the rate is not so high (~4.5% ?). Plus you need to declare the income on your US tax return.

[ravishende]

Basically I am taking a loan in USD (5X1 ARM @ 2.82%)

What kind of loan is this. I doubt Home equity or personal loans have such low rates. If this is the typical housing loan, then you cannot use it for any other purpose