Why Should NRIs invest in the Indian Stock Market?

Why  should NRIs invest in the Indian Stock Market? This was a question asked by a reader on Quora. It got me thinking, I have never really compared the long term returns from stock investment in India and America.  Here’s my analysis. I used the last 10-year data to see how the results look like.

I have not considered the US tax implications of investing in India. In India, the long term capital gains from stocks (long term is longer than 1 year) is non-taxable.

Size of the Indian Stock Market

India has two large stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).  The total market capitalization is over $1.6 Trillion and the daily volume is over $3.5 Billion. It is a large and a liquid market.

Ease of Investment

NRIs have the option of investing with their bankers in India or go with specialist stock brokers. Either ways, the process to get started is relatively straightforward. I believe the NRI must be in India to open a new brokerage account. One thing different than the US is, the application form has around 20-30 signatures!  My understanding is, NRIs are not allowed to speculate and indulge in intra-day trades.

Repatriation of Proceeds

The proceeds from the sale of equity go directly into the NRE account.

Average Returns of NIFTY

Over the last 10 years, the broad NIFTY index has returned about 12-13% annualized returns.

NIFTY – 10 Year Chart

Investing at the right times would result into a much higher return.

USD-INR Conversion Rate

Over the last 10 years, INR has depreciated at an annualized rate of about 3.75%.

USD – INR Over the last 10 years

Hence, on a long term basis, the net annualized return is 12-3.75 = 8.25%. This is assuming the proceeds are repatriated back to the US.

Average Returns from S&P 500

S&P 500 has returned an average of about 6% over the last 10 years.

Should NRIs invest in India?

Long term inflation in the US averages to about 2.5% per year. Hence the net return is 6 – 2.5 = 3.5%.

Comparing the return of 8.25% in India to the return of 3.5%, it is a no brainer that one should invest (at least a small percentage of the portfolio) in India.

One reason for India to do better is where the Indian economy is in the maturity cycle. The demographics in India is very supportive to higher growth rate compared to the US.