Cash in: Rupee falls to Rs13.80 against dirham

The Indian rupee slumped to fresh 31-month lows today, November 15, 2011, dropping to Rs13.80 at 10.00am GMT (2pm UAE time) as Indian inflation remained higher than expected at 9.73 per cent in October, driven by the rising cost of food and fuel.

Analysts warned in the morning that the rupee could test fresh lows today on renewed concerns that EU policymakers would not be able to contain the region's debt crisis. The dollar index stood at 77.87 at 2pm UAE time today, up from yesterday's close of 77.52, fuelling dollar-denominated commodities (oil and gold) as well as currencies linked to the greenback.

In terms of Indian economic outlook, while soaring inflation isn’t good news for the billions of residents in Asia’s third largest economy, the accompanying fall in the country’s currency, which means it costs less dollars (and dirhams) to remit the same amount of rupees is definitely welcome news for millions of non-resident Indians (NRIs).

Says Bank of Baroda GCC Operations CEO Ashok K Gupta: “Expat Indians in the UAE usually accumulate dirham with an eye on the exchange rates and remit funds as soon as the rupee falls.” Even as reports suggest that the beleaguered rupee could fall further, with many NRIs hoping for a repeat of the all-time low level of Rs14.16 versus the dirham achieved in March 2009, there are still others that have resorted to borrowing in order to boost their remittances.

“I’ve taken a salary advance this month to send money home at these rates,” said Avinash P., an Indian national who remitted “around Dh60,000” including his savings yesterday.

The rupee has depreciated 14.4 per cent against the dirham in three months since August, from Rs11.99 on August 2 to Rs13.72 on Monday, November 14, when it hit fresh 2.5 year lows.

With this, 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.

According to data from Indian asset management companies based in the country, Indians in the UAE 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.

Sridhar, another Indian who recently remitted “a lump sum” said he’d taken out a personal loan to prepay his mortgage in India as interest rates in the UAE were much lower compared to what his Indian mortgage provider was charging him. “The strong dirham obviously shaved off a good 10 per cent of my loan,” he said.

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.

The rupee is now at serious risk of testing its all-time low of Rs14.16 against the UAE dirham, achieved in March 2009, according to reports. “[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.

“After a recent break-out, the US dollar INR pair is quoting at a 30-month high of 50.17 levels. The prevailing uncertainty in the financial markets worldwide following the Euro zone debt crisis has fuelled a surge in the US dollar, which remains the ultimate safe haven play during times of ambiguity, regardless of the nation’s own problems,” the ICICI report highlighted.

The dollar is up 2.4 per cent against the Indian rupee since November 9, and rose this morning to Rs50.50 against the greenback, a fresh 31-month high.

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