Expats despair as rupee rebounds

Indian expats’ joy on the back of the rupee making new lifetime lows last week was short-lived as the country emerged out of its policy paralysis by freezing a controversial ruling and offering tax sops to foreign banks.

The Indian rupee posted its biggest gains in six weeks yesterday after the government announced that it was going to postpone by one year a controversial ruling on foreign taxation, helping soothe concerns about foreign fund flows.

The rupee strengthened to Rs14.34 against the UAE dirham in early trade this morning (8am UAE time; 4am GMT), a rise of 2.2 per cent over Friday’s low of Rs14.67, and is currently (11.20am UAE time; 7.20am GMT) trading at Rs14.42 against Dh1.

On Monday, India’s Finance Minister Pranab Mukherjee told lawmakers that the country will delay the General Anti-Avoidance Rule (GAAR) until fiscal 2013/14.

The legislation, once implemented, would allow authorities to scrutinise past deals where they think taxes may have been avoided by routing investments via other countries, and would mean that the government will have the authority to tax such entities with retrospective effect.

The Indian government also said on Monday it would exempt foreign banks from paying tax for setting up local units as it looks to ring-fence such units against external economic shocks.

Additionally, suspected intervention by the country’s central bank, the Reserve Bank of India (RBI), helped the beleaguered rupee claw back some of its losses, even as the rupee’s long-term forecast remains negative.

In a recent update on the country’s currency, Swiss investment bank UBS said it sees the rupee falling to Rs56 against the US dollar (Rs15.24 against the UAE dirham) on a widening fiscal deficit and alarming levels of regulatory ambiguity.

While yesterday’s move may have cleared the regulatory ambiguity in the very short term, the long-term fundamental weakness in the Indian economy will mean that the rupee could slip to fresh all-time lows later in the year.

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