Hold your dirhams; Indian rupee may fall further

The Indian currency’s weakness, that started a week ago, is being watched by the expatriate community and investors in the Gulf.

They had been holding back major remittances due to the unfavourable exchange rate that prevailed for some months.

Reversing the trend of strong rupee that prevailed throughout 2010, the Indian currency has started weakening recently due to Egyptian crisis and on oil crossing $100 a barrel. Foreign Institutional Investors have been reportedly selling Indian stocks – in January alone the FIIs have sold equities worth $1,053.50 million. High oil prices, mounting domestic inflation, political unrest in Egypt and the upward movement of interest rate in India are factors that can further weaken the Indian currency.

Ameir Hamsa A, CEO Dubai office of State Bank of Travancore said: “The Indian rupee was weakening consecutively till last Thursday and on Friday it gained marginally. There has been a strong corelation between the Indian stock market index and the foreign exchange rate.  However, the 3000 point fall in the stock market index recently did not cause a corresponding weakening of the Indian rupee. The trend on Friday was contradictory and investors are looking forward to the market reopening on Monday.”

SBT handles expatriate remittance business in the UAE through City Exchange. SBT is one of the leading Indian banks that handles a major chunk of expatriate remittances to South India.

“If the Indian rupee keeps weakening, remittances from the UAE and GCC countries will pick up. Many high net worth individuals (HNWIs) and Indian businessmen have been holding back their remittances because the rupee was appreciating.

The rate for Rs1,000 is now more than Dh80. The HNWIs are waiting for the rupee to go back to Dh74-level. If the rate falls below Dh80, there will be a substantial increase in remittances,” said Ameir.

He added that salaried people send their earnings irrespective of the exchange rate, but the upper middle class and HNWIs will hold back their remittances. “These customers will send their remittances to India only if the exchange rate is very good,” he added.

Renjith UR, Assistant Manager, South Indian Bank, a leading Indian private bank that manages Hadi Express Exchange in the UAE said: “We are seeing a reasonable increase in NRI remittance to India because investors are now getting the best exchange rate for the last several months. The volume of remittances handled through our exchange houses is going up.

Most of the money exchanges are giving good exchange rate in the range of Dh80 to Dh81 per Rs1,000. The rate may fall further, if the oil price continues to increase and political stability is not restored in Egypt and other Middle Eastern countries.”

He said Indian banks are getting more deposits from overseas Indians because the interest rate on NRO (Non-Resident Overseas) Account deposits is increased. “We are giving 10 per cent interest for NRO deposits and even after reducing the income tax on interest yield, the NRI deposits get very good interest rates.” He said the NRO interest rate was earlier in the range of 8 to 9 per cent.

As against a strong rupee in 2010, the Indian currency has depreciated by more than 2.3 per cent vis-à-vis the US dollar this year, according to US investment bank Goldman Sachs. "We continue to believe that the rupee will weaken against the dollar to sustained high current account deficits and weaker balance of payments. Our 3, 6, 12-month USD/INR forecasts remain at 46, 46.2 and 47, respectively," said a Goldman Sachs report.

While the inflow of dollar to the country has dried up, FIIs have started withdrawing dollars from India to invest in the reviving US and European markets. Bankers feel that the Reserve Bank of India could have intervened on Friday to stabilise the rupee.

“The interest rate is also going up in India and some investors may swap their foreign currency holdings with Indian rupee deposits. Most of the private banks have increased the deposit rates,” Ameir added. Investment in real estate, especially land purchases by expatriate is also stabilised.

“Even if the Indian economy is doing well, an improvement in the American economy will strengthen the dollar, because more investments are in dollars,” Ameir added.

"Rupee will keep moving in the range bound manner. It is possible that the rupee will depreciate to Rs12.50 to Rs12.60 per dirham in the near future. The current exchange rate is Rs12.38-Rs12.40. Even at this rate, remittances have increased," said KR Vijaykumar, Assistant General Manager and Chief Representative, Federal Bank, a leading Indian bank.

He said when the Indian stock market falls, the rupee normally depreciates. "Recent political scandals in India have also affected sentiment and they are not yet subsided. High inflation is a worrying factor that prompted the Reserve Bank of India to increase repo and reverse repo rates. If interest rate goes up, it will have a dampening effect on the economy. The cost of production will go up, affecting the competitiveness of Indian exports further affecting the foreign exchange flow to the country."

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