Indians skimp on foreign investments

A couple of years ago, options were aplenty for affluent Indian investors looking to park a portion of their wealth abroad.

Beaten-down property prices in cities ranging from London to Detroit made for mouth-watering deals and investment options such as US stocks and real estate investment trusts (REITs) looked all the more appealing with a falling rupee.

Then came the RBI’s decision to sharply prune the sums that Indians may send abroad. It reduced the limits under the Liberalised Remittance Scheme (LRS) from $200,000 to $75,000. It also banned investment in property abroad. And the party came to an abrupt end.

The limitation on overseas remittances has forced Indians to stick to essentials, such as maintenance of relatives and funding studies and medical treatment for their kith and kin abroad.

But now that the RBI has eased these limits once again in June 2014, from $75,000 to $1,25,000, and the curbs on property buying, are affluent Indians gung-ho about overseas investments?

Offshore options Not really. For one, with Indian markets picking up and shooting through the roof, high net worth investors may see less reason to seek greener pastures abroad.

Two, with the rupee holding steady, the temptation to flee to dollar assets has also abated.

It is worth noting that while the Dow Jones Industrial Average has made a 4 per cent return so far in 2014, the Nifty is up 25 per cent.

With domestic interest rates stuck at 8 per cent-plus, debt options are aplenty within India.

The property market is also looking up a bit, after being in the doldrums last year.

This is why wealth managers say that while HNIs are likely to send more abroad to make use of the higher limits, they’re unlikely to get back to aggressive investment mode. “This is merely partial reinstatement of old limits. With Indian markets expected to do well in the coming years, LRS limits may not necessarily be used for investing in offshore opportunities.

“There is a higher probability of it being used for non-investment purposes,” says Rajesh Iyer, Head - Investment Advisory Services and Family Office, Kotak Wealth Management.

Genome Capital CEO Atul Kumar concurs, “This is not a meaningful increase. Limits were already available for medical travel and education remittance.”

According to the RBI data, of the total outward remittances of $1 billion in 2013-14, a fourth went into ‘gifts’, 16 per cent into maintenance of close relatives and another 15 per cent into funding studies abroad. Only 15 per cent of the total remittances were actually equity or debt investments. Responding to the RBI’s changes, investors have reduced property purchases by 24 per cent in 2013-14.

They also seem to have cut back mainly on sums they remitted for maintenance of relatives.

This category saw a 23 per cent fall while remittances for medical treatment were trimmed by only 4 per cent. Travel-related remittances fell by two-thirds from 2012-13 levels.

“HNIs are allowed to take money outside India under various other items like BTQ (Basic Travellers Quota),” as a result of which funds for this purpose might not have been remitted under the LRS, explains Iyer.

Property spends

Debt and equity may be out now, but what about property investments? A rebound in global prices and the still limited LRS ceiling make such purchases difficult, say experts. “They’ve permitted real estate investments again. But I don’t think there will be much of an increase.

“Cities such as Dubai, Singapore, London and New York are the preferred destinations for real estate purchases by Indians. There, the property prices have risen by 20 and 40 per cent on average,” says Kumar.

“It may be difficult to obtain property in key cities such as New York and London for $75,000.

Hence, an investor will have to send multiple remittances over a few years before he can acquire property,” Iyer says.

Rise in remittances But there are some areas where remittances have increased, and will continue to, despite the reduced limits, say experts.

For example, overseas remittances for studies abroad shot up by over a fourth in 2013-14, almost surpassing investments in equity and debt, thanks to rising college fees and living expenses overseas, besides the growing ranks of Indian students studying abroad.

What’s more, remittances for gifting purposes rose by 2 per cent. The LRS Scheme was first introduced in February 2004 to facilitate resident individuals to freely remit up to $25,000 per calendar year, which was enhanced to $50,000 per financial year in December 2006, then to $1,00,000 every financial year in May 2007 and then to $2,00,000 every financial year in September 2007.

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