With the Indian rupee continuing to appreciate for the fifth straight week, the one question on the minds of every Indian expat in the UAE (or anywhere else, for that matter) is whether to hold back their remittances in the hope of a better exchange rate, or to cut their losses now and transfer cash before the dollar plunges further against the now-mighty rupee.
The rupee famously declined 16 per cent in 2011, and made an all-time low of Rs14.62 versus one UAE dirham on December 16, 2011. Non-resident Indians (NRIs) who remitted money on that day (or around it) supposedly made a killing as the Asian currency suddenly decided that it had seen enough weakness and has been developing muscles since then.
In the 50-odd days since then, the rupee has reversed 9.5 per cent of its 2011 losses, rebounding to a 3-month high of Rs13.23 against Dh1 as of February 5, 2012. In January alone, the rupee staged an uprising of sorts when it appreciated 7 per cent for the month – its best monthly performance in over a decade.
So, what gives?
To take a shot at predicting the rupee’s future direction, let’s first look at the reasons behind its newfound vigour. Economists believe that a fresh increase in capital inflows into India is responsible for its firming up. That, in fact, means that Indian expats who are cringing at the rupee’s recent highs are, in part, to be blamed for its ascent.
By remitting record amounts of money in the recent past (with NRIs getting best-ever exchange rates coupled with near-10 per cent interest rates in fixed deposits, who can blame them?), Indian expats opened the liquidity floodgates, prompting a reversal in the rupee’s fortunes.
According to the World Bank’s estimates, remittance flows to India were the highest in the world and stood at $57.8 billion in 2011 – or more than $4.8bn per month – 7 per cent higher than 2010. With the recent hike in interest rates that Indian banks can offer to NRIs, that amount has, anecdotally, seen a huge spike.
Additionally, with it being the beginning of the calendar year, the amount of money being pumped into India, an emerging market, by foreign institutional investors (FIIs) is also substantial, and is adding to the rupee’s strength.
While FIIs were net sellers in Indian equity markets in 2011 (an outflow of $358m compared with an inflow of $29.4bn in 2010), the FIIs are expected to be net buyers this year, with the month of January witnessing a net FII fund inflow of $2.05bn into equity markets.
While this trend may abate in the coming months, analysts believe that, ultimately, India’s long-term growth fundamentals are what will drive its currency up – or down. With the Indian economy expected to slow down further, affected as it is by the slowdown in exports to the Euro Zone countries as well as the US, the country’s trade deficit is set to widen this year.
In that case, the rupee may not strengthen a lot and, in fact, the country’s Central Bank may take steps to depreciate it a bit as a stronger rupee hurts its exporters and results in a slowdown in NRI money, both of which earn it much-needed foreign exchange.
While the rupee may not weaken in a hurry, expats who can hold back remittances in the medium term (six months or so) may get a more favourable exchange rate. But for those with a monthly commitment back home – mortgage payments or family subsistence allowances – now may be as good a time as ever to remit.