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Foreign Exchange for Expats in India

Submitted: August 2013

India’s official currency is the Indian rupee (INR). The symbols “₹” and “Rs” are also used. The Reserve Bank of India (RBI) is responsible for monetary policy.

The Indian rupee is also accepted in Nepal and Bhutan alongside their respective national currencies.

Exchange rate regime

The rupee is not subject to a currency peg. However, the RBI frequently intervenes on the foreign exchange market. Therefore, the rupee is close to a managed floating exchange rate.

The purpose of RBI interventions on the currency market is primarily to curb speculation and to reduce volatility. Accordingly, India does not target a specific exchange rate, at least officially.

Exchange rate trends

Over the long run, the Indian rupee persistently depreciates. This is largely due to structural high inflation rates and comparatively high money supply expansions.

To preserve the real value of their savings, expatriates must:

Don’t be blurred by long-term rupee depreciation, as this is just a fall in the nominal exchange rate. Instead, you are more concerned with the real exchange rate.

Example

Mike is a British citizen and he plans to move to India in January 2024.

In January 2021, the GBP/INR exchange rate is 150 and Mike decides to transfer £30,000 into India. He immediately opens an Indian 3-year term savings account (at 13%) to invest the proceeds. Back home, UK savings accounts offer no more than 2%.

In January 2024, the rupee has fallen hard and the GBP/INR exchange rate is 200. Mike wonders if he should have parked his funds in the UK instead of transferring money to India early. We test below the two following scenarios:

 

Mike keeps his GBP

Mike converts his GBP into INR

Initial funds (in 2021)

£30,000

₹45,00,000

Interest paid

£1,836

₹19,93,037

Value on January 2024

£31,836

₹64,93,037

Conversion into INR at ₹200 for each £1

₹62,77,200

N/A

Despite the large Indian rupee depreciation (or sterling appreciation), Mike was better off converting his GBP three years in advance.

The example above is for illustrative purposes only, and is designed to show you the fictitious side of rupee depreciations. In fact, real-life situations from an expat perspective may involve many other variables, and this may require professional advice. See Wealth Management for Expats in India.

Exchange rate adjustments

As indicated above, India may have structurally large inflation differentials with your home country. Thus, you must make adjustments to ascertain a real exchange rate. There is no set way of doing this, but this is typically achieved by adjusting the exchange rate for inflation. Alternatively, you can adjust the exchange rate for money supply.

Here is an illustrative example:

Example

Matt is a US citizen, and he is planning to use his US dollars to buy an Indian item worth ₹500 in year 1. He wonders if he should wait for year 2 and save money in the meantime.
In year 1, the USD/INR exchange rate is 50. It rises to 51 in year 2. Inflation between year 1 and year 2 is 2.5% in the US and 6% in India. We assume that Matt has an inflation-matching savings account in the US.

 

Matt buys in year 1

Matt buys in year 2

Rupee price

₹500

₹530

US dollar price

$10

$10.39

Accumulated savings

 

$10.25

In year 2, the Indian item is effectively $0.14 more expensive even though the rupee has fallen by 2% (from 50 to 51).

This means that the rupee has probably appreciated versus the US dollar in real terms.

In practice, it is hard to get a hold on an inflation-adjusted exchange rate graph. This is why it is important to understand these dynamics. Failure to do so may lead you to make bad decisions.

Monetary policy

The RBI may intervene to regulate the economy, be it to avoid overheating or to provide monetary stimulus. Reserve requirements and central bank interest rates may vary accordingly.

When the RBI decides to tighten monetary policy, credit availability dries up, interest rates rise and inflation may go down.

There is no formal inflation-targeting in India. However, there are signs that the RBI is increasingly willing to anchor inflation rates close to 5%, or even below. The RBI is concerned with the Wholesale Price Index (WPI) rather than the Consumer Price Index (CPI). At the moment, the former is much lower than the latter.

 

 




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