Transferring money now instead of waiting for exchange rate to go up

ravishende · Post by **ravishende** » Mon Sep 12, 2011 1:58 am

I am planning to R2I in 4 years. I have 200K in cash which I want to transfer in these 4 yrs to get the best exchange rate. However I was thinking instead of waiting for the exchange rate to go up further if I transfer the money now at Rs46, after 4 years I may get an equivalent of Rs 49.50 . These are my calculations and I was wondering if I am correct with them and have not missed out on anything

Consider I have 100 dollars which is giving an interest of 1% in US bank
If I transfer today to India (@ Rs46) : 4600
1 year from now ( @ 4% NRE account): 4600 + 184 = 4784
1 year from now after paying US taxes on interest (@ 35%): 4600 + 119.6 = 4719.6

If money stays in US
1 year from now ( @ 1% US Savings account): 100 + 1= 101 dollars
1 year for 46.89om now after paying US taxes on interest (@ 35%): 100 + .65= 100.65 dollars

So at the end of 1 year, I see that I get an equivalent exchange rate of: 4719.6/100.65 = 46.89
This means every year I can get 89 paise more assuming the same interests rates/taxes.

After 4 years the exchange rate i would get will be 46 +.89 *4 = 49.56. which leads me to believe that it makes sense to transfer the money now rather than wait for the exchange rate to go up to 49-50 which may not happen.

Did I miss anything in my calculations?

cmk786 · Post by **cmk786** » Mon Sep 12, 2011 2:16 am

Why are you so sure that the dollar value keep going up every year and in 4 years you get rs 49.50 for a dollar. It could go either way. Dollar value may even come down in 4 years to less tha rs 46.00. But you seems to be very sure that the dollar value keep going up. Please tell me why you are so sure.

lokesh122 · Post by **lokesh122** » Thu Sep 15, 2011 11:30 pm

cmk786;409374Why are you so sure that the dollar value keep going up every year and in 4 years you get rs 49.50 for a dollar. It could go either way. Dollar value may even come down in 4 years to less tha rs 46.00. But you seems to be very sure that the dollar value keep going up. Please tell me why you are so sure.

The decision would look even better if the $$ value goes down. Ravi would loose some if for example $$ value goes up more than 89 paise in each year, which could happen.

I did transfer lot of my savings to India as I was not happy with the interest I was getting in US banks.

anuj106 · Post by **anuj106** » Wed Nov 02, 2011 8:36 pm

The returns would get even better if the money is invested in FD's (through NRO A/C)which are giving interest @ 9.25% although there is tax liability @ 15 % as per India USA DTAA.

Putting the new interest rate , with new Dollar Rate , in your example the revised returns would be as follows:-

If you transfer today to India (@ Rs49) : 4900
1 year from now ( @ 9.25% NRO account): 4900 + 385.26(453.25 - less 15% tax) = 5285.26
1 year from now after paying US taxes on interest (@ 35%): 4900 + 294.61(after taking credit of Indian taxes)= 5194.61

If money stays in US
1 year from now ( @ 1% US Savings account): 100 + 1= 101 dollars
1 year for 46.89om now after paying US taxes on interest (@ 35%): 100 + .65= 100.65 dollars

So at the end of 1 year, you see that you can get an equivalent exchange rate of: 5194.61/100.65 = 51.61
This means every year you can get Rs. 2.61 more assuming the same interest rates/taxes.

Anuj
femaquery at gmail dot com

afza04 · Post by **afza04** » Wed Nov 02, 2011 8:58 pm

i would say prefer move that 200K and invest in any real estate/land in india which will return more than any of those calculations.

SetToGo · Post by **SetToGo** » Wed Nov 02, 2011 9:03 pm

Please read this: http://en.wikipedia.org/wiki/Interest_rate_parity

If there was such an easy arbitrage, all banks could have made billions of dollars by now!

ravishende · Post by **ravishende** » Thu Nov 03, 2011 9:11 am

The article you posted makes no sense to me. It is just a bunch of formulae with no specific examples. Can you take my scenario and explain how the "interest rate parity" would make a difference. Also we are looking at around 2% more per year.Not sure how banks can make billions of dollars on 2% more income

SetToGo · Post by **SetToGo** » Sun Nov 06, 2011 5:51 pm

The concept behind interest rate parity is simple. What it's saying is that the scenario you are describing is an arbitrage (look for definition on Wiki) and it doesn't exist so easily. Even if you are talking about 2% in this hypothetical scenario, that's good enough for banks who are investing 100s of billions of your and my money (deposits). Wouldn't it be easier for them to take our deposits move it to India get their 2% and give us our money back? They don't have to lend to any individuals or corporations here in US, which is arguably more risky than an easy 2% in arbitrage.

Here's the explanation of the article:

Say you invest $100 and the exchange rate today is $1 = Rs 50.

Also assume the interest rate in India is 10% and the banks in US are giving 0% (for simplicity of calculations).

So after 1 year you have Rs 5,500 in India ($100 x Rs 50 + 10% interest).

What no arbitrage condition means that the exchange rate has to adjust in that period to $1 = Rs 55. So if you bring the money back to US it is still $100 (same as interest earned in US $0).

No one knows or can predict the exact exchange rate in the future. That's the reason most multi-national companies and banks use forward exchange rate to guarantee a known exchange rate. This forward rate is also determined based on the interest rate parity.

I know the exchange rate also depends on several factors: supply-demand, monetary policy, reserves etc. Bu in any scenario if you are getting higher returns, there has to be a reason for it. No one gives you higher returns without the risk. So do your investing with risk in mind.

sandip666 · Post by **sandip666** » Fri Nov 18, 2011 10:23 am

ravishende;421629The article you posted makes no sense to me. It is just a bunch of formulae with no specific examples. Can you take my scenario and explain how the "interest rate parity" would make a difference. Also we are looking at around 2% more per year.Not sure how banks can make billions of dollars on 2% more income

I am surprised SetToGo actually answered your question patiently.

Don't mean to be harsh, but this is a fundamental concept in finance. Nothing wrong with you not knowing it, especially if you are not in finance, so don't feel bad.
But it might be interesting and educational for you to read it and try to understand it, at least from a concept perspective. Otherwise you will be asking innocently dumb questions like the one you asked above.

ravishende · Post by **ravishende** » Sat Nov 19, 2011 8:20 am

Most of these concepts are true in theory but not practical. Besides if you browse this site there are a lot of dumb questions. There are VPs who manage 100+ people but want to know how to find a job in India or people asking where to find a good maid. So if you dont have anything concrete dont bother replying