Why Indian rupee will go to Rs19 vs Dh1

The Indian rupee continues to make and break new records on a daily basis, with the beleaguered currency once again slumping to new lows in early trade on Thursday.

The rupee breached another significant milestone Thursday on its way down, slumping below the Rs65-mark against the greenback, and was trading at Rs65.529 vs. $1 and Rs17.84vs. Dh1 at 10.00am UAE time (06.00am GMT).

The currency’s slide continues even as the central bank, the Reserve Bank of India (RBI), took fresh measures Wednesday to pump the country’s banking system with fresh liquidity in order to avoid a cash-crunch crisis.

Importers in the country have been struggling to cope with increased demand for US dollars as they need to spend more rupees per greenback for bringing in oil and other essential goods into the country.

In addition, the heightened probability of the US Federal Reserve withdrawing its bond-buying programme in a phased manner starting next month is also weighing heavily on the rupee as well as other emerging market currencies, some of whom have in the past benefitted from America’s dollar-printing binge.

 Why the rupee might fall to Rs19 vs Dh1 by next month

At least two major global investment banks are maintaining that the beleaguered Indian rupee, which is already down about 15 per cent since the beginning of 2013, could see a further deterioration of about 10.5 per cent in the near future and slump to Rs70 against the US dollar.

That would equate to a level of Rs19 against the UAE dirham, and if attained, this exchange rate is likely to prompt a surge in remittances by expat Indians in the UAE and across the Gulf and indeed the world.

Zurich-headquartered UBS as well as the Frankfurt-based Deutsche Bank both believe that the Indian rupee will continue its plunge and will probably hit the Rs70-level against the US dollar sometime soon. While UBS hasn’t offered a timeframe in its forecast, Deutsche Bank maintains that the rupee could see that level in a month or so.

A note issued yesterday by the bank says: “We continue to believe that fundamentally the rupee is undervalued and has overshot its equilibrium level substantially, but as numerous episodes of past currency crises have amply demonstrated, under a scenario of deep pessimism, currencies can overshoot substantially and remain so for a long time.”

It added: “India, we fear, is entering such a zone.”

The Indian rupee has been on a steep downward journey for some time now, especially since the beginning of May this year, having lost almost 19 per cent of its value since then. The currency has lost almost half (46.5 per cent) of its worth in the past five years, and if the Rs70 vs. $1 prediction comes true by next month, that would translate into a loss of 61 per cent of its value in 60 months.

Incoming Reserve Bank of India (RBI) governor Raghuram Rajan, who is scheduled to take over the reins of the RBI from incumbent D. Subbarao next month, has already stated that he doesn’t have a magic wand to set the wrongs in the Indian economy right, suggesting that it is going to be a painfully long path to fiscal fitness.

India has taken a slew of steps of late to arrest the slump in the rupee, including imposing a 10 per cent import duty on gold and silver, repeatedly hiking the price of retail fuel, and imposing foreign investment restrictions on Indian companies.

Yesterday, India also announced a ban on air travellers bringing in flat-panel TVs with them from overseas destinations such as Dubai, Bangkok and Singapore, citing a decline in the rupee. This particular move has angered a large section of non-resident Indians, who maintain that their TV imports have no significant effect on the worth of the rupee since they make such purchases in the currency they earn and spend – and not the Indian rupee.

Further, a section of analysts believes that the country’s financial management team may be barking on the wrong tree. Instead of restricting spending by individuals and corporates, as has been the case so far, they suggest that India should be looking at supplementing foreign revenue. A falling rupee, in that case, is good news for the country’s exporters as it makes their exports more competitive vis-à-vis exports from other countries whose currencies may not have devalued as much as the rupee.

According to Kamal Vachani, Director of Dubai-based Al Maya Group and Regional Director, Electronics and Computer Software Export Promotion Council (ESC), the rupee will continue to fall drastically if the Indian government does not take steps to prevent the slide. 

“NRIs are now sending money slowly as they are watching the situation and feel that rupee will slide more in the coming days. Exports of 100 per cent Indian merchandise, products in which imported goods are not used, are growing. However, India’s imports are getting costlier due to depreciation of the rupee.  This will also make goods sold in India costlier.  Yesterday, New Delhi imposed duty on TVs brought by air travellers to boost the sales of indigenous products.

“The Indian government should take some drastic policies to stop rupee’s slide.   Foreign investors will be cautious in investing in India till the air is clear,” said Vachani.


 

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