Long term prospects of Singapore

[revhappy]

Hi Guys,

I am from india and have relocated from India about a month ago. I had not done enough research about exchange rates prior to coming here.

After doing some research I have noticed that the current rate of SGD/INR of Rs 33-34 per SGD is about the best rate historically. In 2007 boom when the INR had appreciated sharply the rate vs SGD was Rs 25 per SGD! That is about 25% less.

I have also looked at historical charts and noticed that in the last 10 years the SGD has gradually appreciated vs the USD and current rate is much much better than the 2001 low, whereas the INR is currently at rock bottom, even below its 2001 low.

Everyone says that the future of India and China is great and so it is logical that the INR should appreaciate from here, I am still surprised at how much the INR has fallen.

What do you guys think is the future of the SGD vs the USD and vs INR?
Is the current rate the best or do you guys think it can appreacite even from here?

Cheers,
Revhappy

[jpatokal]

SGD is carefully managed by the Monetary Authority of Singapore according to an undisclosed currency basket, so there are no wild swings against the major currencies: it's been more or less 2 SGD to the euro, around 1.5 to the USD and 70 yen to the S$ for the past five years.

So it's really the volatility of the rupee you have to worry about. However, given that India's exports (which bring in hard currency and push up the rupee) are nowhere near China's, and that the Indian government is running a huge deficit (increasing the temptation to print money and let them inflate away), I think betting on a strengthening rupee in the short term is a risky bet.

Just my 2 paise

[revhappy]

...I think betting on a strengthening rupee in the short term is a risky bet.

Just my 2 paise

Ok that sounds great cuz I am earning in SGD and converting all my savings into INR

What is your call for the SGD/INR for the next 2 years? I am saving about 3000 SGD per month and right now the rates are perfect for me to just keep converting to INR as soon as I get my salary.

Untill when do you think INR will stay weak? And how low do you think the SGD/INR can go? anything below 1 SGD = 30 INR will be terrible for me and I will have to employ some hedging strategy like taking a personal loan at 7% interest and it be still be profitable if INR were to strenghthen beyond 30 Rs to a SGD..

Waiting for you valueable suggestion

[hg]

Would you mind explaining the hedging strategy you mentioned?

[revhappy]

Would you mind explaining the hedging strategy you mentioned?

Say you are saving 2000 SGD every month and intend to send to India. But you are worried that the exchange rate will not remain at 33 RS for 1 SGD, You can take a personal loan 6% for amount of 20,000 SGD for 1 year and immediately convert it to INR and send it to India.

Everymonth you have to pay 2000 SGD to the bank instead of sending it to India

If INR were to fall below 30 Rs it is a 10% loss from a price of 33! so even though you are paying 6% as interest you are still saving 4%.

This is called hedging because you can rest assured for a year that you are not affected if the SGD were to fall below 31 RS.
But if the SGD were to strengthen to 34-35 then you dont make any gains out of it. The only loss is the hedging premium which is the 6% interest you pay to the bank.

Another way of hedging will be to open a Forex trading account and short sell a 1 year forward future contract of SGD/INR for a value of 20,000$

In this case if the SGD strengthens at the end of the year you gain because of the short trade of the future contract but you also lose an equivalent amount because your salary savings at the end of the year is now worth fewer Rs. But net-net you are protected

If the SGD were to weaken at the end of the year you lose because of the short trade but you make up due to the salary savings in RS.

In this method the premium is much much lower than 6% but forex derivatives are very complex and you might need expert advise.

Sometimes even the experts who claim to be so are not really good. Because lot of IT companies in India who used forex derivatives for hedging against USD were not really sold the right products by the banks.
Another problem is you might not get the right lot size of the derivative product and of the right duration.

If you really savvy about trading and stuff you might want to employ hedging just for the heck of it. But if not dont bother it might not be worth the effort!

Cheers,
Revhappy

[hg]

Phew !! Are you in a different league or what

[quidsin]

I would avoid the personal loan to be honest.

Go straight for the forward FX contract with an online money broker. Lay down 10% in margin to hedge what you intend to save over the year and then roll it when it expires. This will cost you nothing - the broker makes his money on the spread which is minimal for a small trade to be honest.

Re. long term outlook for the Rupee. I wouldn't be so pesemistic to be honest - INR will see uptick soon. We're now seeing definite signals that risk takers are back in the market looking to take advantage of markets outside the US and China / India are high up on the priority list. The USD is the worlds reserve currency and when recession bites, everone piles their cash into US Treasuries. We're now seeing currencies which have taken a battering over the last year on the road to recovery - this is the first signal that a recession is drawing to a close, then the equity markets will see proper bounce.

Singapore do control their currency through a weighted basket with their top 5 trading partners - no one knows the exact split as this guarded very closely by the MAS. However, they have to be very careful with this method in that they don't price themselves out of the export market compared to local export competitiors Malaysia, Indonesia and Thailand. Therefore, don't be surpirsed to read now and again when the MAS intervene to weaken the currency.

[littlegreenman]

Hi Revhappy,

I was in the situation you were in before, earning in SGD and saving in EUR. At the time interest rates in the EUR were considerably higher than SGD so what I did was buy EUR forward 1 year and due to the interest differential the EUR came at a discount.

In your case I believe INR interest rates are higher than SGD interest rates. So you could also enter a FRA and buy your INR at a discount. This gives you two benefits: you can fix your exchange rate and you get a discount making use of the interest rate differential. This is also better than taking up a loan when actually you should be gaining on the higher INR interest (which then gives you the discount).

Regarding the exchange rate itself: yes the SGD is managed against a basket of major currencies, however having said that, I did some statistical tests and found that the SGD mirrors the USD with a margin of error of about 7% within a 95% confidence interval over a 10 year period. Hence what you should be monitoring is INR/USD as this will be the same however you have much more information available. The SGD is dirty floating within a band but they never reveal where the band is. The best you can do is look in BBG or Reuters for indications. You can find reports with comments from FX traders on the lower and upper bound on the band there... As you can see though this is hear-say and no hard facts. So you are better of developing your strategy against the USD allowing for a little bit of error.

[revhappy]

@quidsin, @Littlegreenman Thanks a lot for your suggestions!

I checked out with a couple of FX brokers and they didnt have the SGD/INR pair. Since the INR is not a fully convertible currency, it is not available as an forward contract. But it is available as a Non Deliverable Forward contract.

I am not at all familiar with Currency trading. Could you guys give me the names of Reputed Forex brokers who are likely to have the INR as an NDF? And on whom I could rely upon for some advice.. I know that Standard Chartered has this service but their min investment is USD200,000. I am planning to hedge for about 10%-20% of that amount!

Thanks In Advance!
Revhappy.

[littlegreenman]

In a non-deliverable forward you basically get the net difference paid at maturity. ie you do your non-deliverable, then at maturity you convert your SGD to INR @ Spot and you get the difference between this trade and the initial non-deliverable paid out (or you have to pay it out if the SGD rose against the INR).

I did my forward though Credit Suisse PWM. They were cheaper than Deutsche Bank PWM both of which I use regularly.