UAE expats cringe as a stronger Indian rupee pinches pockets

Dh1 will fetch less than Rs14.35 at today’s exchange rates

A stronger Indian rupee is eating into the dirham buffer of UAE expats as they now need to spend more dirhams to remit the same amount of rupees to their home country.

The Indian rupee has gained 7 per cent against the UAE dirham (and, of course, the US dollar) in past 3 months, making remittances that much less sweeter for Indian expats in the country and elsewhere in the region and across the world.

At today’s mid-day rates (September 24, 2012), Dh1 will fetch just Rs14.32 while being remitted as the international exchange rate (forex trading) stands at Rs14.50 for Dh1 at 11.30am UAE time (7.30am GMT). This compares with a forex trading rate of Rs15.55 that a dirham fetched just three months ago – on June 24, 2012.

The announcement of a third round of quantitative easing, or QE 3, doesn’t bode well for the US dollar (and dollar-linked currencies such as the UAE dirham), and emerging market currencies such as the Indian rupee will particularly benefit from this movement.

Moreover, the Indian government announced some much-needed major reforms of late, including the opening up of the Indian retail sector for foreign participation, and a reduction of subsidy on diesel, among others. “The government’s newfound resolve will help the Reserve Bank of India (RBI) to cut rates and provide some monetary stimulus. Any such moves will be positive for stocks and the rupee,” HDFC Securities analyst Subash Gangadharan wrote in his latest weekly currency markets perspective.

But he suggests market participants to be cautious, as global and local news could prove to be a zero-sum game for the rupee.

“The announcement of bond buying by the Fed has left most puzzled, as officials committed to an open-ended buying of $40 billion of mortgaged-backed securities per month. This is different from QE1 and QE2 when the Fed announced a target for bond purchases, and markets knew how much stimulus was being provided,” he wrote.

“A material improvement in the European financial market conditions has also hurt the outlook for the safe-haven greenback. Continued calm could push it to fresh lows across the board. It will, therefore, take a significant wave of risk-aversion to help the US dollar recover from the recent round of debasement,” he added.

“Continuing weakness in the greenback, combined with the euphoria created by the Indian government’s reform measures last week, can propel the USD/INR pair towards the 53 levels [Dh1 = Rs14.43],” he added.

It could, however, turn out to be a non-event as in the past, when the Indian government has had to rollback its reform agenda due to pressure from its political allies, who it needs badly in order to survive in power. “Markets would be keen to know if political pressure applied by allies and opposition alike would force the government to roll back any of its latest reforms. Any rollback could see stocks and the rupee suffer some losses,” said Gangadharan.

 

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