In the year 2022, 7500 HNI Indians moved abroad. That means 7500 HNI families are no longer investing or contributing to the Indian economy. Lately, Indians looking at investment opportunities beyond their home country’s borders have evolved dramatically in recent years. This increasing trend of Indians investing abroad through the Liberalized Remittance Scheme (LRS) and Overseas Direct Investment (ODI) has led to discussions and debates within the financial circuit.
As economic globalization continues to reform the world, it is essential to examine the motivations behind this trend, the benefits it offers, and the possible implications for India’s economy and its investors.
LRS and ODI overview
The Liberalized Remittance Scheme (LRS) was introduced by the Reserve Bank of India (RBI) in 2004, allowing Indian residents to remit USD 25000 per annum, overseas for various purposes, including education, travel, and investment. This limit has been revised in various stages and is now USD 250,000.
Overseas Direct Investment (ODI), on the other hand, involves Indian businesses and individuals directly investing in foreign enterprises. Both LRS and ODI are avenues through which Indians can diversify their portfolios and access international markets.
What do Statistics have to say?
According to the RBI’s data, outward remittances under the LRS have witnessed a substantial rise over the last few years. In FY 23, Indians sent USD 27.14 Billion abroad under this scheme, up nearly 40% YoY. Majority of this accounted for travel while investments and maintenance of close relatives were other major categories.
Motivations Behind the Trend
Several factors contribute to the growing trend of Indians investing abroad. More and more Indian investors are understanding the importance of diversifying their portfolios to mitigate risks. By investing abroad, they can reduce their dependence on the domestic market’s fluctuations and benefit from the potential growth of other economies.
Investors who wish to send their children abroad for studies find it prudent to have savings in dollars. Study Abroad is no longer a norm for only affluent families, the number of students going abroad is increasing every year and hence more demand for LRS investments.
Besides, the LRS and ODI provide Indian investors with access to international financial instruments, which might not be as readily available or well-developed in India. Markets such as the US, London, Singapore or even Dubai provide sophisticated options such as Structured Notes, Auto Call Notes, Global Funds, Leveraged Debt, and Universal Life Insurance that appeal to a more informed and global Indian investor.
Another silver lining is the option of leveraging, since lending rates are cheaper in developed economies, investors can borrow on their existing portfolios and invest more while maintaining their ROI. In India, interest rates are very high and leveraging is not conducive.
Overseas markets also provide access to certain sectors like Semiconductors and Consumer-Tech that don’t exist or are very new in the Indian stock market. These sectors provide for good investment opportunities, they have global companies with trillions of dollars of market cap giving several options to investors.
Furthermore, investing abroad can act as a form of currency hedging, guarding investors from the instability of the Indian rupee. Historically, the rupee has been depreciating approximately 4% annually vis-a- vis the dollar, investing in USD means capital return of 4% over and above the returns generated by investments. When they hold assets denominated in foreign currencies, they can potentially shield themselves from currency depreciation.
Benefits and Considerations
The growing trend of Indians investing abroad brings both benefits and considerations:
Benefits
By diversifying their investments internationally, Indians can spread risk across different markets and asset classes. Investing abroad provides exposure to innovative and rapidly growing industries, potentially leading to higher returns. Foreign investments can act as a hedge against currency fluctuations, offering a level of stability to an investor’s portfolio. It also serves as a tool for education planning.
Challenges
Investing abroad comes with regulatory challenges and compliance requirements that investors need to navigate. Different markets come with varying levels of risk that a foreign investor may not understand in its entirety. Thorough research and due diligence are essential to making informed investment decisions. Also, while the LRS allows remittances for investment purposes, repatriating funds can be subject to restrictions and regulatory changes.
To Conclude
The growing trend of Indians investing abroad through the Liberalized Remittance Scheme (LRS) and Overseas Direct Investment (ODI) points to the increasing desire for diversification, access to global markets, and potentially better returns. As the world becomes more interconnected, Indians are exploring opportunities beyond their borders, recognizing the potential benefits and advantages of international investments.
However, it is important for investors to carefully comprehend the regulatory demands, evaluate risks, and conduct due diligence before venturing into foreign markets. With a precise approach and a well-informed strategy, Indian investors can successfully capitalize on the benefits of global investment diversification.
