The patriotism of wealthy Indians living abroad has helped India avert economic crises in the past, so it comes as no surprise that embattled policymakers are turning to them to plug a record trade gap that is punishing the rupee.
This time, though, big investors among the 25 million-plus overseas Indian community—the world's second-largest diaspora—are demurring as the economic outlook darkens and political instability looms ahead of national elections.
Shoring up inflows from overseas Indians is one of Finance Minister P. Chidambaram's key instruments to prop up the rupee, which has lost 20 percent against the dollar this year and dropped to a record low Wednesday.
The currency's crash has boosted remittances, mainly from blue-collar workers—particularly in the Gulf—who can get more rupees for hard currency. But it has not triggered a surge in high-value investments in real estate, private equity funds and stock markets, bankers and wealth managers said.
Underlining the hesitancy, flows from nonresident Indians (NRIs) into bank deposits in the second quarter dropped to $5.5 billion from $6.6 billion a year earlier, central bank data show.
Real estate investments by NRIs dropped about 30 percent in the fiscal year that ended in March, according to the Confederation of Real Estate Developers' Associations of India (CREDAI), an umbrella group of local property developers.
"People feel like there are too many unknowns," said Vasant Prabhu, chief financial officer of Starwood Hotels & Resorts Worldwide in New York. "The most recent government has been ghastly, and nobody quite knows what comes after it. I haven't been optimistic about India for quite a while.
"You don't know what the bottom of the rupee is," he said in comments underscored by a rupee that stumbled from 63 per dollar Friday to almost 69 per dollar Wednesday—a sharp move over such a short period for a currency.
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Wealth managers and bankers in Britain, the U.S. and India say NRI clients saw too many risks, despite the tantalizing prospect of buying assets with a cheap rupee.
Economic growth is at its weakest in a decade. New Delhi is struggling to close a record deficit in the current account—the broadest measure of a country's international trade—and a national election that must be held by May could tempt the government to spend to win over voters and so undermine its fiscal discipline.
In addition, emerging markets are losing favor with investors generally as the prospect of the United States' reining in its economic stimulus draws cash into U.S. assets.
In a bid to attract funds, India liberalized bank deposits, and some banks raised rates for NRIs this month. They could secure interest rates of more than 8.5 percent on one-year rupee deposits and as much as 10 percent on three-year accounts, a relatively high return compared with many other countries whose rates remain near historic lows.
"All these folks always had this strong belief that India is the safest country to invest, and four, five years back when the rest of the world was collapsing, India was still growing," said Anil Behl, head of wealth and strategy at IndusInd Bank.
"That mood has changed now," he said. "I can certainly feel that some NRIs are looking at dollar-based products from international stables. ... They are very wary of pure rupee products."
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The government goes out of its way to tug at the heartstrings of white-collar expatriates, such as those in Silicon Valley and at top investment banks in London, to raise funds and cushion the impact of slowing institutional inflows. There is even a ministry for Overseas Indian Affairs that has NRI investment as a core goal.
New Delhi has managed to entice investors in the past with attractive deposit arrangements and bonds. It issued a five-year Resurgent India Bond in 1998, raising more than $4 billion, and in 2000 it raised $5.5 billion through a deposit scheme.
Asia's third-largest economy was the top recipient of remittances from diaspora in 2012, at about $70 billion, followed by China at $66 billion, World Bank figures show. India received about $63 billion in remittances in 2011.
But many investors are now staring at losses as the rupee's plunge since May has wiped out gains they made on investments in private equity funds and mutual funds in the last few years.
"For people who are dollar-invested, that's a large hit," said Ajay Kaisth, principal of New Jersey-based Kai Advisors, which has $30 million under management, of which more than 60 percent is from Indian clients.
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After trading broadly at about 45 per dollar in 2010 and 2011, the rupee has dropped more than 30 percent.
The economy is likely to grow even more slowly in fiscal 2013/14 than the decade-low of 5 percent struck the previous year, as investment will stay weak because of a lack of reform and the uncertainty ahead of the election, a Reuters poll showed.
The rupee has become the worst performer by far among Asian emerging-market currencies tracked by Reuters, despite the government and central bank's frantic attempts to support it.
Lalit Kumar Jain, chairman of CREDAI, said property purchases by Indian expatriates were now needs-based rather than speculative, reducing what has been a key type of demand.
As a portfolio investment destination, India also faces daunting competition as developed markets, including the United States, show signs of emerging from the global financial crisis, said Bundeep Singh Rangar, who advises individuals and companies on India investments as chairman of London-based IndusView Advisors.
That's a cause of concern, he said, "because the biggest champion of India is its diaspora, and if they are losing faith you can imagine how much the non-Indian investor would be losing faith."