Indian rupee falls badly against dirham; remittances surge

Positive exchange rate, improving jobs prospects and low cost of remittance are boosting UAE remittances

Indian expatriates in the UAE and elsewhere across the world are once again remitting record sums of money as the Indian rupee slumped to below Rs15.19 versus the UAE dirham and Rs55.79 against the US dollar this afternoon.

A new World Bank report maintains that India is set to once again be the top recipient of remittances from its expatriate workforce, with the country estimated to gain $70 billion by way of inward remittances this year, a fifth more compared with $58 billion that it received in 2011.

According to World Bank’s latest Migration and Development Brief, “strong economic activity in the Gulf Cooperation Council (GCC) countries” is the primary driver of an increase in global remittances, with South Asia and the Mena region witnessing the strongest growth among developing countries.

“Strong oil prices have also impacted outward remittances from the GCC countries. Remittance inflows to South Asia in particular have increased significantly during 2012,” the report maintains.

In addition, the report estimates remittance flows across the world to rise further in the next three years. “The growth of remittances is expected to be stronger during 2013-15. We expect growth of flows to remain robust in regions that rely on remittance flows from the US, the GCC, and Russia,” the report points out.

“Increasingly harsh rhetoric and policies hostile towards migrants in many destination countries, especially Europe, however, could discourage the flow of migrants in the future and subsequently weaken remittance flows,” it states.

“Exchange rate is a major factor that determines trends in remittance flows,” the report argues. “An unexpected depreciation of the home currency can spur a surge in remittance flows via a ‘sale effect’ that encourages migrants to remit home their savings to make large purchases such as land, house, and durable assets.”

This is perhaps one of the major reasons why Indian expats have remitted record sums of money from the UAE and elsewhere across the world.

The Indian rupee, along with the Bangladeshi taka, has seen one of the worst declines in the last year-and-a-half against the US dollar and dollar-linked currencies. The rupee, which traded at Rs11.99 against the UAE dirham on August 2, 2011, slumped to Rs15.55 on June 25, 2012, a decline of 30 per cent in 11 months.

Although the rupee has since recovered a little, most analysts do not see it stabilizing in the near future with the Indian government’s policy-making paralysis set to continue at least until the 2014 general elections. A stalemate in the reforms agenda in the world’s largest democracy has been one of the primary reasons for the rupee’s decline, as investors have chosen the safety of the dollar over the speculative nature of the Indian currency.

In addition, the cost of remitting money from the UAE is among the cheapest in the world, with the transfer of funds costing (in third quarter of 2012) about 5 per cent of the amount transferred. This compares very favourably with the global average remittance price (i.e., average based on all countries for which price data is available) of 8.96 per cent in the third quarter of 2012.

Moreover, an improving global economy has resulted in a worldwide employment boost, which in turn will continue to fuel remittance flows, the World Bank report maintains. “The US is the largest recipient of migrants from developing countries as well as the largest sender of remittances. The US economy has resumed growth, although still modest, after shrinking in 2008 and 2009,” it says.

“Migrant employment in the US has picked up considerably – and faster than employment of native workers – since 2009 and has recovered to the pre-crisis level. This recovery, however, has favoured higher-skilled occupations in healthcare and technical services more than lower-skilled occupations in construction. Data on the number of housing starts show that although the construction sector has stabilized after bottoming out in 2009, it is still far lower than the pre-crisis level.

“Interestingly, native employment in the construction sector has fallen more than that for unskilled igrants, and has actually increased for naturalized foreign-born individuals. Migrants have responded o a shrinking construction sector by moving to other services and trade sectors. Naturalized citizens have been better able to make this change compared with native-born and foreign-born non-citizens, which includes undocumented migrants”.

(Home page image courtesy Shutterstock)

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