Investing in the rupee

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The Indian Rupee is fast becoming one of the most sought-after and powerful currencies in the world. If you’re interested in knowing what makes the Rupee a good currency, watch the video succeeding this chapter. Taking the increase in popularity and perceived value of the Indian Rupee into account, many resident individuals and domestic and foreign institutional investors have begun to actively show interest in investing in the Rupee.

As a Non-Resident Indian, you too can invest in the Rupee and make use of its price movements to earn handsome returns on your investment. If you’re interested in getting to know how to invest in the Rupee, then this chapter is for you. Let’s begin.

How can NRIs invest in the Rupee?

For Non-Resident Indians, there are primarily two different ways through which you can invest in the Rupee. Here’s an overview of both of these ways.

1. Through the OTC market

Also known as the currency spot market, the OTC market is one of the easiest ways through which you can invest in the Indian currency. Transacting through the OTC market is fairly straightforward, whereby you sell a foreign currency to purchase the Indian Rupee.

The Indian currency that you purchase can be held in a bank account for however long you wish. And when you’re ready to liquidate, you can simply sell the Indian Rupee back through the OTC market and purchase the foreign currency of your choice.

That said, here’s something that you need to keep in mind. The OTC market is composed of multiple players such as banks, corporations, financial institutions, and other individuals. Currency transactions with Banks and financial institutions carry the least amount of counterparty risk, whereas the ones with individuals tend to carry higher counterparty risk. And so, this is something that you should consider when using the OTC market to conduct currency transactions.

2. Through the currency derivative market

Alternatively, NRIs can also invest in the Rupee through the currency derivative market. Currently in India, the National Stock Exchange provides a range of derivative contracts such as futures and options with INR currency pairs as the underlying asset. That said, NRIs weren’t allowed to participate in the currency derivative market until the year 2017. 

But at present, NRIs can participate in the currency derivative market subject to certain terms and conditions. Here’s a quick look at a few of them.

  • NRIs can trade in currency derivatives only through an Authorized Dealer Category 1 Bank (AD Bank).
  • The Authorized Dealer Category 1 Bank that an NRI partners with should also be a clearing member of the clearing corporation or the stock exchange.
  • The Authorized Dealer Category 1 Bank is responsible for monitoring all of the transactions conducted by the NRI and is tasked with reporting them to the Reserve Bank of India.
  • NRIs are permitted to trade only in the following four INR currency pairs - USD INR, EUR INR, GBP INR, and JPY INR subject to positional limits.

Through currency derivatives, you can not only hedge currency risk, but also make use of short-term price movements to earn returns as well. Although derivative contracts have short-term validity, they come with a major advantage over the OTC market - lack of counterparty risk. Since the derivative contracts are exchange traded, they’re completely regulated by the stock exchanges. Therefore, there’s absolutely no scope for fraudulent transactions or default.

 

Wrapping Up

Remember, if you’re looking to invest in the Rupee, opting to do so via the currency derivative market may just be the right choice. It comes with a whole lot of advantages compared to the OTC market. And with this, we’ve finally come to the end of this module. In the next one, we’ll be taking a look at the various taxes and laws that NRIs have to account for while investing.

A quick recap

  • As a Non-Resident Indian, you too can invest in the Rupee and make use of its price movements to earn handsome returns on your investment. 
  • You can invest in the rupee through the OTC market or the currency derivative market.
  • Transacting through the OTC market is fairly straightforward, whereby you sell a foreign currency to purchase the Indian Rupee. 
  • The Indian currency that you purchase can be held in a bank account for however long you wish.

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FAQ'S

Yes, NRIs need to pay taxes on any profits earned by buying or selling currency derivatives of any INR pair. This is because these gains are deemed to have their source in India.
No. NRIs are permitted to trade only in the following four INR currency pairs - USD INR, EUR INR, GBP INR, and JPY INR, subject to positional limits. So, you cannot trade in any other INR currency pair, and that includes the CHF INR pair.
Before investing or trading in the rupee, NRIs should be aware of the recent developments in the Indian economy, as well as in the economy of the country whose currency is paired with INR. That aside, NRIs also need to be aware of the tax laws relating to investments in the rupee.
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