Indian rupee bull run hits NRIs hard

The past week saw a stream of bull runs on the commodities market with crude oil climbing to a 17-month high level on the New York Mercantile Exchange and gold flirting at $1,100 (Dh4,040) an ounce.

However, there is another bull run going on – less palpable but not least significant – across the Arabian Sea. The Indian rupee last week strengthened to a 19-month peak against the US dollar, almost at the same time when the bellwether 30-share index of the Bombay Stock Exchange (BSE Sensex) crossed the 18,000 mark for the first time in more than two years.

While the rupee's runaway gains against the dollar is definitely causing heartburn to Indian exporters as it is eating into their dollar-denominated earnings, Indian expatriates living in the UAE too are having to contend with varying degrees of unease, say experts. So how is a gaining rupee a loss for Indians living in the UAE and how to ride the rupee-dollar roller coaster?

More for less

As per estimates, the partly convertible Indian rupee has gained by around five per cent so far this year. Since the dirham is pegged to the dollar, any depreciation in the value of the dollar against the rupee dents the remitting capacity of Indian expats in the UAE who convert the dirham into the Indian rupee to send money home to support families. The upshot: to get the same number of rupees, they have to pay more dirhams as the former has appreciated.

"It is definitely a setback for NRIs (Non-Resident Indians) because many workers in the UAE remit money to India for household expenditure of their families. A few years back they used to remit around Dh72 for every Rs1,000 but now they have to pay around Dh83 for the same Rs1,000," said K V Shamsudheen, Director of Barjeel Geojit Securities, Dubai.

Their problem has been aggravated also because, except for house rent, the cost of living in the UAE hasn't come down in the same proportion. To make matters worse, household expenditure in India has also increased by as much as 15 per cent a year because of soaring headline inflation, especially high food price inflation.

Because of both these factors the capability to remit money is coming down because at the same salary level, they find it difficult to send the same amount that they were sending a few years back, he said.

Double trouble

The double jeopardy is that the capability of Indian workers to save is coming down and at the same time the commitment to send money to India has increased because of the low exchange rate. This is more common among low and middle-salaried people since high-salaried people comprise comparatively a very small percentage, he said.

An estimated five million Indian expatriates live in the six Gulf Co-operation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, and they remit close to $27 billion to India every year, whcih amount has been burgeoning over the years.

However, as the rupee strengthens against the dollar, the earnings and remittances of Indian expatriates decline and any further rupee appreciation could have serious implications as many have cut down their expensesto meet obligations in India, said Pradeep Unni, Senior Research Analyst/Trader, Richcomm Global Services, Dubai. He said NRI investments in India were also at risk as they lose from their profits in India while repatriating funds to the GCC.

From the start of this year, the Indian rupee has appreciated by five per cent against the US dollar. This means a direct deduction in earnings of Indian expatriates when they convert their earnings into Indian rupees.

Managing risk

From the same time last year, the Indian rupee has appreciated by more than 11.5 per cent. A weaker rupee is ideally favourable to the expatriate population, Unni said. From a foreign investor's and expatriate's point of view, fluctuations in the Indian rupee clearly present a risk that needs to be managed, as the value of their investments and cash flows directly hinge on the value of the rupee in their home currencies.

Further, the Indian rupee movement has also been vividly reflecting the Indian stock market sentiment with the currency strengthening as the stock market keeps rising. Most of the gains in rupee and the stock markets are coming on the back of increased appetite of foreign investors on Indian stock markets, said Unni. Foreign Institutional Investors (FIIs) injected a record $4.54bn in the month of March.

According to the latest data by SEBI (Securities and Exchange Board of India, the Indian securities market regulator), FIIs have pumped in $4.37bn into Indian equities over the last three months, most of it accruing only during March this year.

Hedging a solution

These investments carry the risk of currency changes, which can be hedged on exchange-traded contracts outside India. Individual investors too can hedge portfolio risks on the exchange. Smaller size contracts with lower margins and narrower spread turn this contract an ideal one for expatriates, exporters, importers and investors dealing with the currency, said Unni.

In the UAE, for instance, the Indian rupee (INR) futures on the Dubai Gold and Commodities Exchange (DGCX) is the only Indian rupee futures contract outside of India providing a means to hedge currency risk associated with movements in the rupee and that is drawing lot of hedgers, he said.

A clear understanding of the INR contract specification on DGCX, its advantages and methods of hedging the risk can be learned from recognised professionals in the field.

"In addition to hedgers, we also have a lot of speculators who take the advantage of short-term price movements in the rupee. The contract is a boon to all Indian expatriates in the GCC and other countries, as the Reserve Bank of India (India's central bank) effectively prevents NRIs from trading in the same contract traded in India. We currently see a lot of investors visiting us to understand and trade this product," he explained.

EXPORTERS BEAR THE BRUNT

While the appreciating rupee has eroded earnings of Indian exporters, it's a bit different for UAE-based exporters. With the rupee-dollar exchange rate hovering around Rs44.50 from a low of Rs50 at the same time last year, Indian exporters' profits are bound to fall in the coming months if the trend continues. Exporters are also operating at cost price or at marginal loss as there is no way to stave off the rising rupee. Buyers abroad are not ready to share the burden as many exporters from other countries have started to deal directly in dollars which makes Indian exports uncompetitive, said Unni.

Key sectors in India that are directly impacted are textiles, IT, services and heavy industrial goods. But for exporters in the UAE, this rise is a blessing in disguise as the apperception increases demand from India as imports from abroad become cheaper. But it can hit them back when the rupee starts weakening again. Hence both exporters and importers are under risk, he said.

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