RBI's Promotion of Indian Rupee for Global Trade: Impact on USD to INR Rate?

The Indian Rupee has closed at a 20-week low against the US dollar. Paired with the unexpected outcome of the US presidential election this past week, the main reasons for dragging the rupee down can be accredited to the strike on black money via demonetization of high-value currency notes and weak industrial output. The US currency, in turn, has strengthened based on speculations that the policies of the US President-elect Donald Trump would be inflationary and lead to a rise in the interest rates, thus impacting foreign money flow to emerging countries like India.Foreign investors withdrew over Rs. 2,350 crore from the stock markets as the US-backed assets are looking more attractive and as a result, the economy is expected to improve in the coming quarters.According to India ratings, the sudden decline in money supply and a simultaneous increase in bank deposits - due to withdrawal of 500 and 1000 rupee notes - will adversely impact consumption demand in the economy. This, coupled with the depreciation of real estate, construction and informal sectors, will further weaken the rupee in the upcoming months. It is very much possible in the upcoming months, as well as even forecasted by many agencies, that US Dollars will become stronger against Indian Rupees. All this means is that the spending power of the NRIs will increase, leading to a rise in the remittance flow to India.Compare. Save. Send Money Home Wisely.TODAY'S BEST RATE USD to INRAdditional ReadingHow will India's Currency Ban Affect NRIs in the USA?How India's currency ban of Rs. 500 & Rs.1000 will affect NRIs?How much Indian Rupees can one carry to India?

It was a shocking, unforeseen turn of events when the Indian government banned the Rs. 500  & Rs. 1000 notes overnight, and simultaneously, the United States elected the new president. With the Indian government scheme banning the Rs. 500 & Rs. 1000 notes in India, many people and businesses are to be affected, especially those operating on cash or undeclared money also known as "black money." With this move, black money holders are left with just two options - either route this money through banks, declare it to be their income, and pay taxes on it, or they burn their stashed notes. This basically means that money will stop flowing as cash, and most of it will be treated as tax-paid income also known as "white money." Thus, the buying power of a person holding tax-paid money will be stronger than those who hold black money.There are 3 ways NRIs will be affected by the currency ban:Real EstateThe real estate market in India will be one of the most heavily affected by the move to ban currency notes of Rs 500 and Rs 1000. This market would crash slowly but is also expected to recover quickly. The market may not favor the seller at this point since very few people have tax-paid money to invest. It is surely a boon to any buyer who will be able to purchase at an affordable rate, however buyers will have to use tax-paid money in order to acquire properties in India. In this equation, the real estate market is expected to drop since the buying power of Indians in India will drastically weaken. On the flipside, the NRIs in the USA will have stronger purchasing power for Indian property as they will possess much more tax-paid cash flow, and the affordability of 1 USD at Rs. 68 will allow NRIs to obtain real-estate much more easily. Congruently, NRIs will have more power to acquire real-estate in the U.S. as the U.S. dollar is expected to depreciate considering the present scenario of eradicating black money.New US PresidencyWith the new presidency in the U.S., one of the first things he has vowed to focus on at the inception of his presidency is immigration reform. By imposing strict immigration policies on legal immigration processes in order to keep it within "historic norms" and increasing prevailing wages for H-1B visa holders, there is a high possibility in employers reducing the number of skilled migrant workers. Immigration reform could also mean a delay in the immigration process for those waiting on permanent residency or citizenship. Though it is too early to conclude anything, it is certain that the cash flow from NRIs in the U.S. to India will begin to increase. This also means that the remittance industry will move to newer heights with NRIs sending more money overseas.Dollar to Rupee EconomicsDue to the government's efforts and objective on eradicating black money from India, the currency in circulation may decline substantially if scrutiny deters people with unaccounted cash from exchanging or depositing money. However, with higher deposits to the currency ratio, the increase in money might mitigate the impact on overall money supply. If the money supply declines temporarily, it may lead to a deflation on the economy. In the long run, this can mean the rupee may get stronger, and the spending power of NRIs holding dollar accounts would drastically increase, in turn, increasing the remittance flow to the USA.TODAY'S BEST RATE USD to INRDisclaimer:  The information represented above is our views on the present scenario of how Currency bans will affect the remittance and NRIs in the USA. The authenticity and accuracy of the article is not guaranteed. Additional ReadingHow India's currency ban of Rs. 500 & Rs.1000 will affect NRIs? 

An Overseas Direct Investment (ODI) refers to investments made by a domestic firm in a foreign country to expand its operations.From an Indian context, Overseas Direct Investment refers to investments outside India as a business strategy. ODI can be made in different forms depending on the company such as:by way of contribution to the capitalor subscription to the Memorandum of a foreign entityor by way of purchase of existing shares of a foreign entity either by market purchaseor private placement or through the stock exchange, by setting up a Joint Venture (JV), or a Wholly Owned Subsidiary (WOS), signifying a long-term interest in the foreign entity.*ODI does not include portfolio investment.Difference Between FDI and ODIForeign Direct Investment (FDI) is when a non-resident Indian invests in an Indian company. Outward Direct Investment (ODI) is when Indian resident companies invest in a wholly-owned subsidiary or a joint venture in a foreign country as part of a strategy to expand their business.Routes of ODI From IndiaDirect investment outside India is governed by Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from time to time. Overseas Investment from India can be made through two routes:i) Automatic Route andii) Approval Route.Under the Automatic Route, an Indian Party does not require any prior approval from the central bank, the Reserve Bank of India (RBI), for making overseas direct investments in a JV/WOS abroad. All those proposals not covered by the conditions under the automatic route require prior approval of the RBI.Who Can Invest Through the ODI Route?An Indian Party can make ODI under the Automatic route in any bonafide activity. However, Indian parties are prohibited from making investments or financial commitments in a foreign entity engaged in real estate or banking business without the prior approval of the RBI.For the above restrictions, real estate means buying and selling of real estate or dealing in Transferable Development Rights (TDRs), not including the development of townships, construction of residential or commercial premises, roads, or bridges.Guide on property related taxation and money transfer for NRIsAn Indian Party is also not permitted to invest in an overseas entity, which offers financial products linked to the Indian Rupee (such as non-deliverable trades involving foreign currency, stock indices linked to the Indian market, rupee exchange rates, etc.), and need prior approval from the RBI.Who Is an Indian Party?Indian Party encompasses:a company incorporated in India or a body created under an Act of Parliament, ora partnership firm registered under the Indian Partnership Act, 1932, ora Limited Liability Partnership (LLP), registered under the Limited Liability Partnership Act, 2008, andany other entity in India as may be notified by the Reserve BankWhen more than one such company, body, or entity invests the foreign JV/WOS, such combination will also constitute an "Indian Party."Furthermore, the Indian Party should not be on the following list:RBI's Exporters' caution list/ list of defaulters to the banking system circulated by the RBI/ CIBIL (Credit Information Bureau of India) orList of defaulters by any other credit information company as approved by the RBI or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority.Also, all transactions relating to the investment in a JV/WOS should be routed through only one branch of an authorized dealer designated by the Indian Party.Investment Limit of an Indian Party:Indian Party can make ODI up to 400% of its net worth (paid-up capital and free reserves) as per its last audited balance sheet.Any Financial Commitment (FC) exceeding USD 1 billion (or its equivalent) in a financial year would require prior approval of the RBI even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet.The prescribed limit will not be applicable if the investment is made out of balance held in the EEFC account (Exchange Earner's Foreign Currency Account) of the Indian Party or out of funds raised through the issue of ADRs/GDRs (American Depository Receipts/ Global Depository Receipts).The total financial commitment of the Indian Party in all the JV/WOS comprise of the following:100% of the number of equity shares and/or CCPS (Compulsorily Convertible Preference Shares)100% of the number of other preference shares100% of the loan amount100% of the amount of corporate guarantee issued by the Indian Party100% of the amount of bank guarantee issued by a resident bank on behalf of JV/WOS of the Indian Party, provided that the bank guarantee is backed by a counter-guarantee/collateral by the Indian Party50% of the amount of performance guarantee issued by the Indian Party.** Investors need prior approval from RBI before transferring remittance beyond the limit prescribed for the financial commitment.Can Resident Indians Make Investment Through ODI Route?Resident Indians can make overseas investments, including purchase of securities and also setting up/acquisition of JV/WOS up to the limit prescribed by the RBI from time to time, per financial year under the Liberalised Remittance Scheme (LRS). Currently, LRS comes with a maximum cap of $250,000 a year per person.Why Is the RBI Warning People About ODI Transfers?RBI regulates ODI made by Indian entities and resident individuals in joint ventures and wholly-owned subsidiaries outside India pursuant to Foreign Exchange Management Regulations, 2004.Recently, RBI has been sending queries and notices to several domestic entities, including companies and large family offices, seeking the status of unutilized money remitted abroad through the ODI route.The remitted funds parked in foreign countries in financial assets including liquid funds by these firms could be a violation of ODI guidelines. Under the general permission, the remitted funds must be used for a specific business purpose. In this case, the firms would need to explain the retention of the remitted money in liquid funds.As per the rule, any Indian Party that plans to make an ODI needs to approach a designated authorized dealer (AD) for investing along with duly signed ODI form, along with supporting documents like Board Resolution, Statutory Auditor Certificate, and many other documents to essentially satisfy the bonafide business test.The investment can be processed once the AD Bank examines and approves the documents according to the regulatory guidelines. A Unique Identification Number (UNI) will be generated for the particular JV/WOS before the remittance. The UNI can be used for further remittances/ investments in the JV/WOS.Mutual funds are another concern of RBI. Investment in mutual funds abroad is that only entities registered as non-banking financial companies (NBFC) can invest the outward remittances in foreign securities. This means funds transferred via the ODI route cannot be used for investments in mutual funds abroad.Resident individuals can remit money outside India under the Liberalised Remittance Scheme (LRS) which has a maximum cap of $250,000 per year per person. The funds remitted under LRS can be used for investing in foreign securities, travel expenses, or sending money to Non-resident Indians (NRI) abroad.The low limit under the LRS is allegedly making more individuals route the remittances through their family offices via the ODI route because the cap for an entity sending money through the ODI route is $1 billion per year or 400% of the net worth.However, the ODI route is for large companies, corporates, or trusts that need to send large amounts of money out of India for business purposes. Sending money from India abroad through ODI to avoid the LRS limit is a violation of the ODI guidelines.ODI From India Dips 68% To USD 754 Million in February 2022ODI is also called outward foreign direct investment or direct investment abroad. The appetite for foreign investment was picking up and many Indian investors and companies were investing/acquiring stakes in numerous foreign companies.However, following the restrictions by the RBI, coupled with the global economic crisis, investments have dropped. According to the RBI data on Outward Foreign Direct Investment, investment for the month of February 2022 (USD 753.61 Million) has dropped by 68% compared to February 2021 (USD 2284.61 Million).*RBI said the data is provisional and is subject to change based on reporting by banks.An increase in ODI can also be seen as a sign of a country's investment competitiveness, higher growth prospects in foreign markets, and a maturing domestic economy.The Covid-19 pandemic has been widely cited as one of the reasons for not utilizing the money sent through the ODI route. Several deals didn't get through due to the second wave of Covid and people didn't want to lose interest in the money, hence have invested in products like liquid funds abroad. And maybe awaiting the right business opportunity to invest the money.In conclusion, for ODI-related investment opportunities, we recommend consulting with a tax advisor. To keep yourself abreast with the latest guidelines pertaining to ODI, the Reserve Bank of India has issued detailed guidelines vide Notification No. FEMA 120/RB-2004 dated July 7, 2004, as amended from time to time, which can be accessed at RBI's website.A Master Direction that has consolidated instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions and is available at the 'Notification' Section on RBI's website.