NRI remittances: Get the most bang for your buck

The rupee has been on a slide, crossing Rs 60 against the US dollar. Analysts project that this will further fall in the next few weeks. According to RaghuramRajan, the country's chief economic advisor, the drop could be a temporary phenomenon.

Whatever the prognosis, there is no denying the fact that this is a great time for Non Resident Indians (NRIs) to make remittances to India. Globally, the Indian diaspora remits over $70 billion every year to India, the largest remittance received by any country.

With all that money being sent home, it's important to ensure that what finally reaches home is the best possible amount. In volatile times like these, even a few paise in exchange conversion can make a difference to your remittance amount. So let's take a look at how you can get the most bang for your buck.

It's not always the transfer fees

There are three things you should remember while remitting funds to India:

The fees for remittance

Depending on what kind of remittance mode you are using, you will have to pay a fee for remittance. For instance, bank wires from a US bank to an Indian bank and can cost you anywhere between $15 to $45 per transaction only as way of charges. Online money transfers on the other hand may charge nominal fees.

The exchange rate on conversion

The exchange rate that you get for your transfer is a critical component. "In fact the biggest element is the foreign exchange rate which can hide steep charges without the user knowing about it," says Balwant Jain, Director of the online financial search engine Apnapaisa.com.

There are two models within this: the fixed rate model and the actual rate model. In a fixed rate model, the transfer service provider will tell you upfront the exchange rate that you will get when your money is transferred. In an actual rate model, the provider will give you only an indicative rate at the time you initiate the transfer. The actual rate will be the one prevailing at the time of transfer.

Suppose you initiate a transfer on day 1 and the money will get credited to the Indian bank account on day 2. In a fixed model, the provider is promising you a rate on day 1, not knowing how much the rate will be on day 2. If the rupee depreciates further on day 2, you will not get the benefit of higher rate and at the same time, if the rupee appreciates, you will be guaranteed of the fixed rate.

In an actual rate model, the service provider only gives you an indicative rate on day 1. The actual rate you will get will be the prevailing rate on day 2. So if the rupee depreciates further on day 2, you will get a better rate than indicated and vice versa. ?But you will only know the rate once the money has been received.Remember that everything comes at a cost. In both models, varying degrees of costs are incorporated in the exchange rate (see illustration below).

Time taken

"The delay in availability, which is essentially an interest cost on your money lying with the bank may also be taken in account. In case your opportunity cost of the money is low (likely scenario when you remit owned funds from US to India) then this cost may be negligible," Jain adds.

llustration

Here's a real time illustration to help explain the impact of costs and exchange rate. We compared 3 money transfer service providers to see the impact on a $1000 remittance from a US bank account to the beneficiary's bank account in India.

So while service A appears the cheapest in terms of cost, the amount remitted is the lowest. While service C appears like the best deal, the rate is indicative and may change at the time of actual remittance.

If the rupee depreciates on the day of transfer, C will give you a better deal. If the rupee appreciates, you will get lesser than indicated under C.

Conclusion

So make sure you compare your individual transaction for all these features across various service providers. In the next article, we will look at the various modes of remittance and how you can pick the one suited to your needs.

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