UAE dirham could fetch Rs14

Indian expatriates in the UAE and across the Gulf are expected to remit large sums of money to their home country as the Indian rupee hit a fresh 31-month low against the US dollar on Friday.

The rupee has depreciated more than 14 per cent against the dirham in three months since August, from Rs11.99 on August 2 to Rs13.69 on Friday, November 11, and hit 2.5 year high during the weekend.

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.

Within the past week, the dollar – to which the UAE dirham and most other Gulf currencies have a fixed peg – has climbed against the Indian rupee in four of the past five sessions, hammering the south Asian currency. The dollar was up more than 2.2 per cent in a week against the rupee on Friday, and 1 UAE dirham fetched 13.688 Indian rupees on the day, a level last seen in April 2009.

India’s stock markets, the benchmark indices Nifty and Sensex, have fallen 4.76 and 4.59 per cent, respectively during the past three months. This is in line with the greenback’s inverse relation with equities, which suggests that as the dollar gains strength, equities come under renewed selling pressure, forcing benchmark indices down.

The rupee dropped against the US dollar for the second straight session on Wednesday while reporting its worst single day losses in one and half month following Moody’s latest downgrade on India’s banking sector and which says it has a negative outlook on the sector.