Borrowing money to remit to India while the rupee is depressed seems like a good move to many expatriate Indians. But they should be sure they understand the risks.
Profit hunters could be heading for a fall
The appeal of making money with little or no effort speaks powerfully to the human psyche and helps explain why practitioners of get-rich-quick systems like Ponzi schemes or Nigerian inheritances continue to entice people, even though the idea of getting something for nothing ought to ring alarm bells in most people's heads.
There is, of course, nothing illegal about the current trend of Indian expatriates taking advantage of the combination of the falling value of the rupee and the relatively high fixed-term interest rates on offer in their home country.
As The National reported yesterday, Indian expatriates in the UAE in particular and the Arabian peninsula in general are a principal reason why non-resident external savings accounts in India have risen by 22 per cent in the past year. But there are risks associated with such returns.
The additional detail that a substantial proportion of those savings accounts are being opened using funds obtained from bank loans ought to give pause for thought, particularly if those taking part do not fully understand the potential downsides associated with such a move.
Of course such a scheme is not money for nothing, even if the returns offered by the rate differentials might make it appear that way.
The cost in this case is a potential one: borrowers are taking on the chance that the situation underpinning the deal might change. The leveraging made possible by the loans increases the potential profits but also the possible losses if, for example, the rupee makes a catastrophic collapse that more than negates the interest rates on offer.
For the many participants in this who fully understand this risk and take it on, that's pure business and good luck to them.
The concern is that those who see only the prospect of easy money are setting themselves up for a fall.
After all, the world economy is still recovering from a recent example where investors saw profits on offer, based on the belief that the US housing market could only go up and that mortgage-backed securities were as safe as, well, houses.