Indians hold on to dirhams as rupee stays strong

The weakening of dollar and dirham against the Indian rupee is prompting expatriates to hold back regular money remittances to the South Asian country.

Remittances may remain lower than usual as experts predict unfavourable exchange rates for the next couple of months. Money transfers are likely to remain low even during the upcoming festival season in India.

Speaking to Emirates 24|7, representatives of Indian banks and money exchange companies in the UAE said they expect the rupee to remain strong as there are no symptoms of reversing the foreign institutional fund flow to India.

At 10:25 a.m. (0455 GMT) on Monday, the partially convertible rupee was at 44.31/32 per dollar, after hitting 44.2525, its highest since April 15 and 0.4 per cent above Friday's close of 44.47/48. Official bank rates on Monday put the exchange rate at Rs11.93 to a rupee.

Most of the Asian currencies have gained strength over the dollar. The dollar-pegged UAE dirham  automatically becomes stronger.

Joseph Thomas, Chief Representative of  IndusInd Bank, a leading Indian bank said: “The Indian currency has been gaining strength almost every day and it seems the currency is strengthening towards the level that it reached last year.  A significant amount of remittances are being held back in the UAE. People who do bulk money transfers to India are now holding back their money in the UAE banks. They either keep it with them or park the funds in temporary deposits in the UAE banks.”

Sudhir Kumar Shetty, Chief Operating Officer, UAE Exchange said September is usually a busy month in terms of remittance because most expatriates send money for Ramadan and the festival season to celebrate Eid, Onam and other festivals which just got over.

“The current rupee-dirham exchange rate is due to the fact that there is huge inflow of foreign investments in the Indian market. As the Indian stock market crossed 20,000 levels and the Ayodhya verdict has removed uncertainty in the market, there is huge dollar inflow and surplus dollar in the market.  In addition, dollar has weakened against most other currencies. The demand for dollar remains same and there is no visible trend of a weakening rupee in the near future,” he said.

The rupee posted its best weekly gain in nine months last week. Reports suggested that the net foreign equity inflows to India in 2010 reached a record $19.2 billion, above last year's $17.5 billion.

That trend does not spell well for the expatriates who usually make the next big remittances for the forthcoming Eid-Al-Zuha, Diwali and other festivals when a lot of money is remitted as gifts and for family celebrations. 

Shetty said the “vast majority of expatriates send money for family maintenance. Irrespective of the exchange rate, they have to remit money for routine family expenses. The surplus money that they send for investments like fixed deposits, stock market or real estate will be held back. They will postpone remittance till the exchange rate improves.” 

He said the remittance flow to India has been affected by the slowdown in the construction industry and the overall economic situation in the UAE. “There is no comparison to the boom days of 2008 or 2007 when thousands of new workers joined the construction boom.  We will come to know about the real impact on remittances by the end of 2010. However, we guess that there is a decline of between 8 to 10 per cent in remittances.”

He said the rupee may continue to gain, unless there is an intervention from the Reserve Bank of India. There are reports that the Indian central bank may shield the rupee if it goes beyond a certain level. “The RBI has lot of limitations. Already interest rates have been hiked to control inflation and if they want to control the rupee’s strengthening, they have to pump in a lot of money to the economy, which will further fuel the inflationary pressure."

In the past, RBI has intervened at levels of Rs43 to Rs44. The possibility of RBI intervention is quite strong if the rupee were to appreciate further, said a research report by IDBI Gilts.

There is ample liquidity in the Indian economy and the rupee gained strength because of increased NRI deposit flow to Indian banks in the first quarter of 2010-11 and large-scale foreign fund flows from Foreign Institutional Investors to the Indian equity market.
 

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