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28 March 2024

NRIs brace for windfall as rupee heads for Rs15 vs dirham

Published
By Vicky Kapur

The Indian rupee fell to a three-month low yesterday, registering Rs14.19 versus the UAE dirham at 3am UAE time, settling at Rs14.17 at the end of the day.

With the recent strength in the US dollar, and therefore the UAE dirham, and a continuous deterioration in India’s economic forecasts, the rupee on Friday broke the Rs52-mark against the US dollar for the first time since January 10, 2012.

The rupee fell to an all-time low of Rs14.62 versus the dirham (Rs54.30 against $1) on December 15, 2011, and experts believe that, barring any major economic reform (unlikely before the 2014 assembly elections), the rupee will test those lows and may even decline to Rs15 versus the dirham (Rs55 against $1).

The recent decline came in the wake of India’s largest annual trade deficit in history, amounting to $185 billion for the fiscal year ended March 31, 2012, despite record exports figures of $303.7b.

However, high oil demand by India’s growing population, coupled with a traditional hunger for gold, were responsible for an imports bill of $488.6b, leading to a huge deficit of 9.9 per cent of the country’s GDP.

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Last week, the country’s central bank, Reserve Bank of India (RBI), announced a bigger-than-expected 50 basis points rate cut, its first in three years, to prop up sagging economic growth.

This move is expected to further weaken the rupee as remittances by non-resident Indians (NRIs), which surged in the initial months of 2012 on higher interest rates, will slow down, depriving Indian importers of the much-needed foreign currency to buy crude oil.

Although the RBI does intervene in the currency market whenever there are sharp movements, the fundamentals of a slowing economy and mounting deficits mean that any effect of the intervention will be short-lived, and that the rupee may slump below its all-time lows.

With oil prices expected to remain firm in the near future, this scenario is likely to play out sooner than later, especially with the RBI expected to further cut interest rates this year to boost India’s GDP growth numbers.

That will bring windfall profits to Indian expats in the UAE and, indeed, across the world, as they will get more rupee for their dollars, dirhams and dinars during their monthly remittances. Experts believe that this may also encourage NRIs to invest in property in India, something that has seen high appreciation in the past few years.