Indian rupee down at 13.87 versus the dirham

The Indian rupee fell to a fresh 32-month low of Rs13.868 against the UAE dirham in early trade today amid depreciation of the euro (and a strengthening dollar) due to the deepening European debt crisis.

The rupee is now down more than 15.6 per cent against the dirham in a little over three months since August, from Rs11.99 on August 2. The beleaguered Asian currency was trading at 13.85 versus the dirham at 9.15am Wednesday, with reports that Indian expats are taking advantage of the favourable exchange rate and remitting huge sums.

According to data from Indian asset management companies based in the UAE, expat Indians in the country may have remitted up to $100 million (Dh372.3m) since August this year, as the UAE’s approximately 1.7 million NRIs take advantage of the rupee’s slump against the dirham.

Remittances from the UAE between July and September 2011 jumped 30 per cent compared to the preceding quarter. India was the world’s largest remittance recipient in 2010 with $55 billion transferred to the country by its citizens living abroad.

Persistent dollar demand from banks and importers and a weak opening in the equity market put additional pressure on the Indian rupee this morning, and experts maintain that the rupee could soon touch 52 against the dollar – i.e., Rs14.16 against the dirham – a low the rupee made in March 2009.

The rupees decline comes in the wake of a high inflation rate, coming as it did despite a decline in global fuel and commodity costs. The persistently high rate surprised economists who were predicting a decline in inflation from the September year-to-date levels of 9.72 per cent. Fuel price inflation for October YTD stood at 14.79 per cent while food inflation is at 11.06 per cent YTD.

The country’s central bank, Reserve Bank of India (RBI), has raised its core interest rate, called the repo rate, 13 times since March 2010 in a bid to hold back soaring prices in Asia’s third largest economy. The RBI’s main repurchase rate now stands at 8.5 per cent, with the apex bank suggesting that it may not increase the cost of borrowing further because of falling growth.

However, the recurring increases in rates have failed to feed through to curb rising domestic food and fuel prices, and a weakening rupee has added to the country’s woes.

“[A] further weakening of the Indian rupee could see the US dollar INR pair head towards the 2009 peak of 52-plus levels [Rs14.16 versus AED] in the near term,” a report from Indian broking firm ICICIdirect noted.

“This could spell trouble for Indian equities, which are inversely correlated to the greenback. A spiralling US dollar would derail the pullback in equities, which could go into a tailspin and re-test the recent lows in the near term,” Pankaj Pandey, head of research at ICICI Securities, added.

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