NRIs might want to wait before remitting money

Late last week, India’s central bank announced steps to attract foreign currency inflows with the objective of stemming the rupee’s record slide. However, despite the efforts – which many believe are too little, too late – analysts maintain that the rupee will continue to stay weak and remain above its previous low of Rs14.22 against the dirham.

“We think that USD/INR will sustain its break above 52.2 – the previous record high,” Morgan Stanley said in its latest research note. That must be heartening for Indian expatriates awaiting their next salary, due within the next couple of days, to remit the next tranche.

The rupee, however, managed to pull back some of its losses during the weekend, and is now trading at Rs14.23 against the dirham, up from Rs14.34 that it reached last Tuesday. But for those expats looking to take maximum advantage of the exchange rate, here’s some more good news: technicals suggest that the rupee could fall to as low as Rs15 against the dirham before the end of the year.

Morgan Stanley reckons that, technically, the rupee could fall to Rs54.8 against the US dollar – i.e., Rs14.919 against the UAE dirham. “The next objective may be as high 54.8 [against the dollar],” Stewart Newnham, research analyst at Morgan Stanley Asia, said in the note.

“The Indian rupee’s underlying fundamentals still appear weak to us, especially the absence of yield support at this important moment for the currency. Indeed, there is the outside chance of an onshore USD squeeze being the catalyst which propels USD/INR to the 54.8 technical objective,” the report said.

The rupee, which has lost a fifth of its value (19.6 per cent) since August 2, is already the worst performing currency this year but technical point still lower. “Ordinarily, we would think it would be difficult for it to break through to such an elevated level when its upside momentum already appears stretched and valuations are becoming cheap,” the note said.

“But the technical charts suggest that it can go higher still… Indeed, it now seems that there is a ‘bullish flag’ technical pattern forming with an objective of 54.8,” it added. On the other hand, Citibank expects the Indian currency to recoup its losses and stabilise going forward thanks to the Reserve Bank of India’s (RBI) intervention. Despite making statements to the contrary, the RBI on Wednesday intervened in the foreign currency market by raising interest rates on deposits for non-resident Indians (NRIs).

The RBI hiked interest rates on 1-year non-resident rupee deposits by 100 basis points to 275 bps above the London inter-bank offered rate (Libor). The earlier rate of 175 bps above Libor had remained unchanged for three years. “Our forecasts are that of the INR bouncing back to Rs50/$ [Rs13.6/Dh] by March 2012 and Rs48.5/$ [Rs13.2/Dh] by Mar 2013,” the bank said.

The rupee last week strengthened to 52.2 against the dollar following the RBI’s announcement, which came after the close of domestic markets.

In a separate move, the RBI also raised the interest rate ceiling on foreign currency loans, making it more lucrative for Indian firms to borrow dollar loans. “On a review of the developments in the global financial markets and current macro-economic conditions, it has been decided, in consultation with the government of India, to modify certain aspects of the external commercial borrowings policy,” an RBI release said on Wednesday.

The objective of both the moves is to boost foreign currency inflow into the country and thus ease the pressure on the beleaguered rupee.