How Foreign Exchange Norms Influence NRI Investments In India

The India Rupee has been depreciating against the Dollar for a while because of the imbalance between supply and demand in the foreign exchange market. The Dollar has also witnessed an appreciation in the international markets.

Even though the Rupee appreciated by 0.4 per cent in July 2015, it depreciated in April, May and June. On September 7, the Rupee depreciated to 66.83 against the Dollar against its value of 63. 87 on August 10, when Chinese Yuan was devalued. This is a depreciation of 4.63 per cent. Non-resident Indians (NRIs) are more likely to invest in real estate in India when the Rupee depreciates against the Dollar. Why is this so?

When the Rupee depreciates against other currencies, NRIs would be able to purchase property in India at a much lower price. Local currencies in many Middle Eastern countries, for instance, are pegged to the US dollar. Factoring this in, real estate developers lure NRIs to buy apartments in India with attractive schemes, when the Rupee depreciates.

However, fluctuations in the currency markets are unpredictable and NRIs would be able to benefit from a falling Rupee only if they close a deal before the currency bounces back. Paying the deal amount upfront is a must because if the payment process is spread over many years, the value of Rupee may rise in this period, wiping out the benefits. Moreover, it is difficult to repatriate large sums of money.

A look at the foreign exchange norms that govern NRI investment in Indian real estate:

• According to the Foreign Exchange Management Act (FEMA), a non-resident Indian may acquire or transfer immovable property in India out of repatriable or non-repatriable funds as long as it is not agricultural land, plantation or a farm house. NRIS can also accept such properties as gifts.

• NRIs may repatriate the sales proceedings, if they had purchased it through foreign exchange using legitimate banking channels, and as long as it does not exceed the money transferred to an NRE (Non-Resident External) account. NRIs cannot repatriate the sales proceeds from more than two residential properties. 

• NRIs are not allowed to buy or transfer real estate assets without the permission of the Reserve Bank of India (RBI). But they are allowed to lease property, if the lease period is less than five years.

• Funds used to buy a property in India should either be transferred here through normal banking channels from abroad or money held in an account complying with FEMA and RBI regulations.

• NRIs can also inherit properties, even from other NRIs, as long as they comply with FEMA norms and RBI regulations. 

How do such foreign exchange norms influence the extent of NRI investment in real estate in India?

Norms restricting investment constraints the development of Indian real estate because wealthy Indians are more likely to invest in real estate. Greater NRI investment in Indian real estate would lead to higher wages in the construction industry. However, when there are limits on the extent of repatriation of sale proceeds, NRIs would be hesitant to invest here.

The Indian real estate sector would also benefit from the expertise of Non-Resident Indians, if there are fewer limits on such investments. Moreover, the lack of clarity in regulatory norms severely constrain the investments in the sector. The Indian government recently decided to consider non-repatriable NRI funds invested in India as domestic investment.  Such norms that are more investor-friendly would lead to a greater inflow of foreign exchange.