Indian interest rates: 5 year CD at 8.5%

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Indian interest rates: 5 year CD at 8.5%

Postby boggler » Fri Jul 26, 2013 12:36 pm

Interest rates on government-insured Indian and other foreign bank accounts are crazy-high: http://www.icicibank.com/interest-rates.html

In a global market, how can interest rates in different countries be so different? Why is this not arbitraged away? In other words, what's the catch?
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Re: Indian interest rates: 5 year CD at 8.5%

Postby buckstar » Fri Jul 26, 2013 12:44 pm

I'll bite - the reason is that you are taking foreign currency risk with this. What good does an 8.5% return do you if the rupee drops 40%?
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Re: Indian interest rates: 5 year CD at 8.5%

Postby WendyW » Fri Jul 26, 2013 12:44 pm

Differences in nominal interest rates reflect the expected depreciation of the foreign currency.

If Indian interest rates are higher than U.S. interest rates by 8%, it's presumably because the rupee is expected to depreciate by 8% per year versus the USD over the next 5 years.

You should end up with the same number of USD in a year (or 5 years) whether you put your money in a U.S. bank in USD, or in an Indian bank in Rupees.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby Ice-9 » Fri Jul 26, 2013 12:44 pm

Currency risk. The Icelandic Krona offered crazy high rates for the time in 2007 as well. In 2008, it seriously lost value.

You can still see the tail end of it if you click on the five-year chart here: http://www.bloomberg.com/quote/USDISK:CUR/chart
While not as bad as 2008, it has still been volatile since then.

And here's a similar chart for the Indian Rupee - check out the 5-year volatility!
http://www.bloomberg.com/quote/USDINR:CUR/chart
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Re: Indian interest rates: 5 year CD at 8.5%

Postby niceguy7376 » Fri Jul 26, 2013 12:47 pm

I am from India and the interest rates there are always high compared to US for the last 20+ years. The currency exchange has been in range of Rs 50 to Rs 59 (last month) for a dollar. Another way I look at it is that loan rates are also high. So most of the housing loans are ARM types and they hover around 9 to 13%. In that sense, US is no different right now as they dont pay us much but also not charge us much.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby hoopy » Fri Jul 26, 2013 12:47 pm

Inflation in India is pretty high compared to most Western countries. In real terms, the return on rupee investment in indian government bonds is quite low. I would guess under 2% a year.

There is also exchange rate risk. If you put in a dollar two years ago (at 45 rupees/dollar), you would have lost about 15-20% of you investment in rupee depreciation.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby linuxizer » Fri Jul 26, 2013 12:49 pm

Look up "global carry trade" and you'll see that the forces that work to align interest rates globally are undertaking risk. Therefore it's not arbitrage in the strictest sense of the word.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby dbltrbl » Fri Jul 26, 2013 12:49 pm

Banks are doing it. Individual investor would lose shirt as you don't have time or access to information. At the end of June rupee went from about $ 1= 54 Rs. to about 61 in about 3 days before settling in about 59-60 range. ( Look up WSJ rates in last week of June) Guess what you lost 13 % so 8% interest is not that good. If you can get an account like weekly rollovers may be but not 1 year CDs or longer. I would be hesitant even for a 6 month CD. By the way rates are 9.5 % or higher for senior citizens (60+ ). Quiet few here on the forum.


If you have to put money in FCNR account where currency risk is ZERO and you get about 2.7% interest. This works as long as you have trust that India will be around in 1 year. These accounts are not insured by any entity so if your bank defaults bye bye dinero. This is a better option for fixed income than 8.5%.


Happy Hunting 8-)
Last edited by dbltrbl on Fri Jul 26, 2013 12:59 pm, edited 2 times in total.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby boggler » Fri Jul 26, 2013 12:50 pm

So in other words, the benefit of the high interest rates is counteracted by high inflation?
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Re: Indian interest rates: 5 year CD at 8.5%

Postby linuxizer » Fri Jul 26, 2013 12:53 pm

boggler wrote:So in other words, the benefit of the high interest rates is counteracted by high inflation?


There's a lot more that moves currencies other than inflation....
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Re: Indian interest rates: 5 year CD at 8.5%

Postby nisiprius » Fri Jul 26, 2013 12:57 pm

Back in the 1970s, when bank interest rates in the U.S. were capped by Regulation Q at 5-1/2% for commercial banks, and banks competed on account-opening gifts--we got a bathroom scale once--I read:
In 'The Only Investment Guide You'll Ever Need,' Andrew Tobias wrote:[A] book explains how by converting your dollars to pesos you can earn 12% on your savings in Mexico instead of 5-1/2% here.... the author reassures, the peso is one of the stablest currencies in the world, having been pegged at a fixed rate to the dollar for 21 years, and the Mexican government has repeatedly stated its intention not to devalue. Now who the heck are you, who needed to buy a book to tell you about this in the first place, supposed to evaluate the stability of the Mexican peso? So, scared of the stock market and impressed by the author's credentials, you take el plunge.

And for 18 months you are getting all the girls. Because while others are pointing lamely to the free clock radios they are getting with their new 5-1/2% savings accounts, you are talking Mexican pesos at 12%.

Comes September, and Mexico announces that its peso is no longer fixed at the rate of 12.5 to the dollar, but will be allowed to "float." Overnight it floats 25% lower, and in a matter of days it is down 40%. Whammo....

(Everything changes and nothing changes. That was 1976. In 1982 the peso was devaluted again--by 80%. In 1995, it dropped 55%. From mid-2002 to mid-2004, it edged down 20%.)
Last edited by nisiprius on Fri Jul 26, 2013 1:00 pm, edited 1 time in total.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby WendyW » Fri Jul 26, 2013 12:59 pm

boggler wrote:So in other words, the benefit of the high interest rates is counteracted by high inflation?


High expected inflation.

You can eliminate currency risk cheaply and easily by entering into a futures market contract to trade rupees for USD in 5 years time.

What you'll find though, is that the 5 year forward rate is not today's spot rate of 60R/USD, but rather something like 90R/USD.

So the extra interest you'll earn by putting your money in an Indian bank, will be exactly offset by the forward exchange rates, which will have the expected rupee depreciation built into them.
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Re: Indian interest rates: 5 year CD at 8.5%

Postby shashiraj8 » Fri Jul 26, 2013 1:43 pm

There was a good discussion earlier on this forum -
viewtopic.php?f=1&t=93218

You might find it useful
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Re: Indian interest rates: 5 year CD at 8.5%

Postby HenryPorter » Sat Jul 27, 2013 12:27 pm

linuxizer wrote:Look up "global carry trade" and you'll see that the forces that work to align interest rates globally are undertaking risk. Therefore it's not arbitrage in the strictest sense of the word.


One of the reasons why I will never think there can be a world currency truly. Maybe USD are accepted everywhere, but you have to go through hoops to get a US dollar to the accounts of J6P in somewhere-stan.There are middlemen, arbitrageurs, government red-tape,etc, along the way that want a cut of the currencies' changing exchange rates. If there was one currency, a global dollar, I could buy up all the Big Macs in BFE-stan at a one Terra Dollar each and transfer them here to the USA and sell them for 2 Terra Dollar apiece and only have to pay a few costs along the way maybe, like some taxes, tariffs, fuel and wage costs to get the Big Macs here. How does the currency trader make anything off me in my business dealings then?
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Re: Indian interest rates: 5 year CD at 8.5%

Postby aaplhpq » Sat Jul 27, 2013 1:10 pm

Don't do this!

I'm of Indian origin, and learned a small lesson a hard way. I transferred $10k money to India when $1 = Rs 45. By the time I pulled it out it was Rs 55, and this was just before the Rupee slid and hit ~60. I got lucky.

Here are the problems
1) Currency risk - This is no better than currency speculation. You should plan what you'll do when the Rupee hits Rs 80 = $1 (which is quite possible)
2) Country/political/social risk - You'd much rather take this risk on the equities side rather than on fixed income side
3) Tax issues in the US - 1) You need to file FBAR when $ outside the US is > $10,000. 2) The income from the India CD is taxes at ordinary income rates.
4) Indian banks - Don't expect the same type of response rates, customer service that you'd expect from US banks
5) Insurance - AFAIK, the deposits are covered by the Indian government for upto only $2500 or so. Moreover the credit rating of India itself is around BBB. So you are taking on much higher risk

This is a horrible way to "invest"
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Re: Indian interest rates: 5 year CD at 8.5%

Postby aaplhpq » Sat Jul 27, 2013 1:13 pm

One more -

6) You can't tax loss harvest, or write off losses against your US income (which you can do with US based equities).

aaplhpq wrote:Don't do this!

I'm of Indian origin, and learned a small lesson a hard way. I transferred $10k money to India when $1 = Rs 45. By the time I pulled it out it was Rs 55, and this was just before the Rupee slid and hit ~60. I got lucky.

Here are the problems
1) Currency risk - This is no better than currency speculation. You should plan what you'll do when the Rupee hits Rs 80 = $1 (which is quite possible)
2) Country/political/social risk - You'd much rather take this risk on the equities side rather than on fixed income side
3) Tax issues in the US - 1) You need to file FBAR when $ outside the US is > $10,000. 2) The income from the India CD is taxes at ordinary income rates.
4) Indian banks - Don't expect the same type of response rates, customer service that you'd expect from US banks
5) Insurance - AFAIK, the deposits are covered by the Indian government for upto only $2500 or so. Moreover the credit rating of India itself is around BBB. So you are taking on much higher risk

This is a horrible way to "invest"
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Re: Indian interest rates: 5 year CD at 8.5%

Postby pradador » Sat Jul 27, 2013 1:21 pm

Can anyone explain what the effect of hedging strategies like the ones used in Vanguard's hedged foreign bond fund (BNDX or VTIBX) would do to the return of these bonds?
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