NRI alert: Rupee may hit Rs15 to Dh1

Indian expats in the UAE and across the world may be happy about the fact that, for once, the electorate back home has decided unanimously in the favour of a political party instead of a fractured verdict.

But the nation’s clearest verdict yet in decades has had financial implications for non-resident Indians (NRIs), with the rupee strengthening to an 11-month high after Narendra Modi-led Bharatiya Janata Party (BJP) received a clear majority in parliamentary seats.

Clearly, it means that expat Indians will now have to spend more dirhams, dollars, dinars and what have you to remit the same amount of rupees back home than what they had to a few months ago. 

The Indian rupee, which had famously collapsed 54 per cent in about two years between July 2011 and September 2013, has since appreciated by 16 per cent - about 5.5 per cent since the beginning of 2014 itself - and, according to analysts, is set to strengthen further.

On September 3, 2013, the Indian rupee made a lifetime low of Rs18.55 against the UAE dirham (Rs68.15 vs $1), but has since recovered, and is now trading at an 11-month high. The million-dirham question, then is: will it continue to strengthen?

“I think there is a little more to come from the rally on the rupee in the near term, as investors begin to appreciate the possibility of real economic reform that Modi’s election victory brings,” Tom Elliott, International Investment Strategist at deVere Group, told Emirates 24|7.

Even as the rupee appreciated to Rs15.90 vs Dh1 (Rs58.41 vs $1) this morning (Monday, May 19), Elliott believes the next few weeks will see a further rally in the rupee. “I’ll go for a target of Rs55/USD [Rs14.97 vs Dh1] in six months, with most of that happening over the next few weeks,” he said in comments to this website.

He’s not alone in this forecast. According to Mirae Asset Management, the rupee could surge to Rs55 vs $1 while Nomura Holdings predicts a rally to Rs57 per 41 (Rs 15.51 vs Dh1) by year-end.

According to Rudra Dalmia, CEO of Saxo Financial Services, “the strengthening has been caused by a number of factors – the strength and decisiveness of the BJP’s victory, the results of India’s corporates in the last two quarters have been strong, and the Reserve Bank of India’s intelligent data-backed intervention, which controlled gold imports and currency spend on international investments.”

He told this website that the RBI’s non-currency-based barter deals with Japan and Iran are among a few other factors responsible for the rupee’s recent strength. “The rupee movement also reflects the inherent strength of the Indian economy and the business community which had been crippled by the poor management of the previous government,” he noted.

“We feel that the RBI will control the rise of the rupee and keep it range-bound in order to ensure the exports of India’s products and services remain competitive with the rest of the developing world.  However, the Indian economy is expected to inherently get stronger because of the decisive victory of the right-wing BJP, which has proved to be extremely business-friendly in the past. The BJP is expected to deliver strong policy measures to correct the current account deficit, enhance foreign direct investments in infrastructure and financial services, and also attract capital in traditionally non-FDI friendly geographies of India by providing intelligent and targeted tax breaks for investors,” Dalmia added.

He, therefore, expects the rupee to remain range-bound and not fluctuate too much in the near future. “The rupee should remain range-bound within +/-2 per cent of its current position for the next two years as volatility upsets the status quo of India’s biggest earner of foreign exchange – export of technology, back office and software services. Better governance will create growth and FDI, but it will also cause inflationary pressures which will balance each other out. Finally, being a controlled currency, the RBI will probably use every rupee upsurge as a dollar/euro buying opportunity to build up forex reserves, similar to what China did in the 1990s and keep the rupee stable,” he said.

“The biggest risk comes from a political fall-out between Modi and the central bank over interest rate policy, with the risk being that interest rates are cut prematurely in a bid by the government to boost growth. Modi may find in Raghuram Rajan, governor of the Reserve Bank of India, an independent mind,” says Elliott.

“Though there are many factors behind the correction, the most important overall factor has been the resurgence in carry trades,” added Dalmia. “It is difficult to see the rupee strengthen further than this current level in the immediate near term unless larger macroeconomic events hurt the US dollar and the euro, primarily the Russia-Nato standoff which could escalate and hurt the western economies,” he added.  

“The RBI has also expressed comfort at the range of Rs58-61 per $ [Rs15.80-16.60 vs Dh1] because it enhances India’s competitiveness in the extremely cost sensitive services & product export business,” Dalmia added.

The reasons for the rally since last September are threefold, says Elliott. He maintains that while the emergence of Modi as a potential prime minister over the period was one factor, it was not by any means the only one.

“First is the significant fall in the current account deficit, 4.5 per cent of GDP to 2.6 per cent. This means India needs to import less capital, which supports the rupee. Second, Raghuram Rajan, a former chief economist at the IMF, has raised interest rates three times since becoming central bank governor last September, demonstrating a determination to bear down on inflation,” he said.

“CPI inflation has fallen from 9.6 per cent in July of last year to 8.3 per cent in March of this year. Rajan’s prompt action to defend the rupee against inflation meant that the currency avoided the turmoil suffered by many other emerging market currencies earlier this year as the US Fed began tapering its quantitative easing program,” he added.

“Third, and more recently, as it became clear that Modi was going to be the winner of the elections, the rupee rallied in anticipation of a business and growth-friendly government coming in (and on the hope that Modi will not force the central bank to sacrifice its recent reputational gains for some quick growth).”

While there have clearly been improvements in India’s fundamental fabric, which has led the stock markets and the foreign exchange markets to rally in India’s favour, have the factors that led to the rupee’s decline been neutralised?

“The rupee fell over the two years prior to last September because of a combination of slower growth, rising inflation and a growing current account deficit,” said Elliott. “So much so that there was fear that credit agencies might downgrade Indian government debt to below investment grade. India was not alone with this mix of problems, which had become common throughout the emerging world as a consequence of the large fiscal stimulus plans put in place in the wake of the 2008 credit crunch,” he said.

“The other reflection of the volatility in the rupee is that the Indian economy still remains extremely dependent on government decisions and policies. This kind of movement based on election results showcases (a) how ineffective the previous regime was and (b) how dependent the Indian business environment is on policies and whims of those in office,” added Saxo’s Dalmia. 

“If India has to emerge as a financial superpower, the institutions of the country have to be strengthened to become non-political and effective no matter which party comes to power. This remains one of the biggest risks in India, however the belief is that the BJP with its decisive mandate will not need to tow to regional masters and be able to set strong nationalist agendas to strengthen the economy,” he added. 

As the world looks to stable growth prospects, will India’s currency hold good? If the BJP-led government indeed keeps its promises of ‘inclusive’ growth and development for India as a whole, NRIs sure wouldn’t mind having to pay a little extra at the remittance counters if their investments in India bear fruits. 

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