The unprecedented decline of the rupee since the end of 2011 has sent shockwaves through markets in India. While there has been a small uptick since the beginning of September, when Raghuram Rajan assumed his post as the governor of the Reserve Bank of India, the currency still remains mired in crisis. A combination of sluggish economic performance and imbalanced international cash flows drove down the currency by more than 20% against the US dollar in the May to September 2013 period alone.
In an attempt to stem the flow of money out of the country, the Reserve Bank imposed draconian measures in mid-August that placed severe restrictions on the ability of Indians to send money abroad. One of the most contentious of these measures is a prohibition on Indians living in India buying property abroad. When you consider that overseas property purchases were one of the top five reasons why Indians sent money out of the country prior to this change, the impact of this new policy is likely to be substantial.
In fact, prior to the ban, overseas property investment in India had been on the rise. One of the main reasons for this can be found in the dire state of the Indian economy itself. With falling exchange rates and economic uncertainty at home, foreign properties allowed Indian investors to reduce risk by holding assets valued in currencies other than the rupee. According to Karthik Jhaveri of Transcend Consulting (India), “This is bad news for investors who were looking to diversify their portfolios by investing abroad. People invested in real estate abroad as valuations there are great and also so that they can offset risks arising out of global political and economic uncertainty.”
This development effectively isolates the Indian property market from the rest of the world. Already, the ownership of Indian properties by individuals from outside the country was banned, except for Indian citizens living abroad – also known as Non-Resident Indians or NRIs. Even in this case, NRIs are limited to paying for mortgages on Indian properties from special Non-Resident External (NRE) bank accounts, which need to be opened using foreign currency. Funds can be remitted to an NRE account from overseas, either by direct bank transfer or by using wireless services such as Transfast.com, but it is not possible to transfer ineligible local funds into the account. In other words, mortgage payments made on Indian properties by NRIs must be funded by foreign deposits.
This clampdown on currency outflows has not been limited to the purchase of properties overseas. At the same time that it announced the purchase prohibition, the Reserve Bank of India also slashed the amount of money that individuals can send out of the country under India’s “Liberalised Remittance Scheme” from US $200,000 to US $75,000 per year. Indian companies have also been affected. They can now only invest amounts equal to their current net worth when looking to make acquisitions abroad – down from four times their net worth prior to the new Reserve Bank decrees.