RBI spoils the party for NRIs as rupee falls off 10-week low

Intervention by the Reserve Bank of India (RBI), the country’s central bank, lifted the Indian rupee off 10-week lows this morning, spoiling the remittance party for Indian expats who were eyeing with anticipation the Rs14 versus Dh1 mark.

Yesterday, the rupee fell to a 10-week low against the US dollar (and, therefore, the dollar-pegged UAE dirham), weighed by dollar demand by oil exporters and a weak showing by local stocks.

Indian expats were hoping for a rerun of the most favorable exchange rate ever that they received last December, with the rupee trading at a shade more than Rs14 to Dh1 at 1.40 pm UAE time (9.40am GMT) on March 26, 2012 – its weakest showing since January 16, when it traded above the 14-mark.

Yesterday’s peak exchange rate for the rupee equated to Rs51.455 against the US dollar.

However, this morning at 11.15am UAE time (7.15am GMT), the rupee has surged to Rs13.85 against the UAE dirham (Rs50.88 against the US dollar) on expectations of aggressive intervention by the RBI, which has fixed the reference rate for the US dollar at Rs51.3090.

Nevertheless, a report issued this morning by Standard Chartered bank maintains that the Indian rupee will remain soft going forward, bogged down by domestic policy stalemate, a diminishing foreign investment inflow and higher oil prices.

“The Indian rupee (INR) started 2012 on a strong note. The picture has since changed significantly, in line with our expectations. Following recent policy disappointments – most notably the budget – portfolio inflows slowed to only $963mn in March (as of March 22) from $7.4bn in February,” said StanChart analyst Priyanka Kishore in the report.

“Meanwhile, the trade deficit remains elevated, fuelling risks to current account deficit financing,” she added.

This, combined with a general slowdown and economic headwinds that the Asian economy faces in 2012 and 2013, is expected to weigh heavily on its currency in the short term. “As a result, we believe the ongoing rally in USD-INR has further legs in the near term, and have raised our end- Q2-2012 forecast to 52.50 [Rs14.29 against the UAE dirham],” Kishore said.

“Potential positives for the INR from late Q2 into Q3 are expectations of weaker oil prices in Q2 on poor seasonals, the eventual onset of the rate-cutting cycle, the Fed’s QE3 and an improvement in India’s growth. However, we expect investors to remain defensive on the currency until these materialize,” she concluded.

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