When I meet NRIs in the UAE to discuss their planning and investment needs, they often remind me of the fixed deposit rates being 9% back home. They feel that compared to the U.A.E. banks that offer only 3% per annum, the Indian FD rates are much better. Consequently NRIs in the UAE send a lot of money to India to avail of the ‘higher’ fixed deposit rates.
Have you ever wondered why Indian Banks offer fixed deposit rates of close to 9%, while the US and U.A.E banks offer around 3% per annum?
If the buying power of both currencies was equal, wouldn’t the rest of the world keep their money in Indian Fixed Deposits to get higher returns? Is that happening? I don’t think so.
The questions above have been bugging me for many years till I got into the industry and decided to investigate the reasons behind this. I found that the fixed deposit rates offered by banks in India as well as the U.A.E, or US for that matter are closely linked to the inflation rates in those countries.
- Historic inflation rates in India over the past 24 years have been hovering around 8-9% per annum, and
- The inflation rate in the UAE has been hovering around 3% over the last 10 years.
The Effect of Indian Inflation on money in India
Here is the part that most NRIs aren’t aware of. They earn their money in US dollars (as UAE dirham is pegged to the dollar). That means that their money in dollars is linked to a 3% inflation rate. If they send money to India and convert it to Indian Rupees, it is now exposed to Indian inflation rates of 8-9%.
The image below shows the effect of both inflation rates on the buying power of their money in each currency.
Explanation
Assume you had US $100,000 (or equivalent in UAE dirhams) in your bank in the UAE. Also assume that you had the equivalent amount in Indian rupees in your bank in India (i.e. INR 63.35 Lakhs) at today’s exchange rate.
The mathematical ‘Rule of 72’ illustrated on the above states that you can divide 72 by the relevant inflation rate to calculate when your expenses will double.
By that logic, living expenses in India double every 8 years, while living expenses in the UAE, exposed to 3% inflation double every 24 years.
This also means that your INR in India will halve in buying power by the year 2023, while your US $100,000 in the UAE will halve in buying power by 2039.
Which currency do you think you should keep your money in?
The currency that loses buying power 3% p.a or the currency that loses buying power at 9% p.a.?Want to inflation-proof your money? Click the button below and ask me how.
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