Dubai: The Indian rupee hit 11 month low on Friday, which gives an expatriate remitter more than additional Rs2 for every US dollar in value.
The currency has come under intense depreciation pressure over the last two weeks, moving from 54.50 to 56.50 against US dollar despite strong capital inflows.
“The recent strength in the dollar has no doubt been a crucial factor behind this move and given the momentum of the “pro‐dollar” trade so far we do not rule out a spike in the USD/INR pair to 57.00 in the near‐term.” Abheek Barua, Chief economist of HDFC Bank, said in a briefing note yesterday. “It is worth pointing out that such a sharp move is unlikely to have been sustained for so long without genuine dollar demand. We suspect that this has come in the form of an unexpected pick up in gold imports that appear to have gathered steam amidst falling global gold prices since April.”
India is the largest recipient of remittances in the world with $70 billion (Dh257.46 billion) flowing in to the country from around the world – including a huge amount from the Middle East.
“This is good news for the non-resident Indians [NRIs], who are in the habit of remitting money to India regularly. Now they get more value for the same dollar amount or any other currency for that matter,” Adeeb Ahamed, Chief Executive of Lulu Exchange Centre, said. “At its lowest in the past eight months or so, it brings a smile to all the Indian expatriates across the globe.”
He said, the main reason causing the rupee to fall is the immense strength of the US Dollar Index, which has touched a three-year high. “The record setting performance of US equities and the improvement in the labour market has made Americans more optimistic about the outlook for the US economy, thereby spurring greater hopes of quantitative easing tapering,” Ahamed said.
Additionally, lack of foreign investment and rising import bills are driving demand for the US currency that is putting pressure on the Indian rupee, officials say. “Rupee is losing value simply due to the demand-supply mismatch caused by rising import bills — especially the defence procurement and lack of foreign investment which is drying up the domestic supply of US dollars,” Sudhir Kumar Shetty, Chief Operating Officer of UAE Exchange Centre’s Global Operations, told Gulf News.
Money exchange houses are cashing in on the extra remittance flows, which has increased in the last few weeks. “This is causing increased remittance activity and we are witnessing a 10 per cent increase in remittance activity due to this factor,” Shetty says. “This is coming from the middle income and higher income groups. The blue collar workers continue to remit as usual due to their social and economic needs, regardless of the exchange rates. However, it is the upper and middle income groups that have disposable income to take advantage of the situation,” Shetty said.
As it is, in an election year, investors are going to remain shaky and will possibly hold their investment till the elections are over. “That’s why, the rupee might remain under pressure for some time,” Shetty says.
Ahamed says the recession in the Eurozone might have its effect on the rupee as well. “The euro, which was seen holding the key level of 1.30, has dropped lower to 1.29 levels on the back of deterioration in the local economic data. For the past month, investors have been selling euros and buying dollars on the premise that the Eurozone is in a recession; and the ECB [European Central Bank] is considering more stimulus at a time when the Fed is considering less,” Ahamed says.
A country with high exports will be happier with a depreciating currency; the same does not apply for India. “India, on the other hand, does not enjoy this luxury, mainly because of increasing demand for oil, which constitutes a major portion of its import basket,” he argues.
The other worry is the high level of gold imports that drains its dollar reserve. India imports about 850 tonnes of gold every year. “A large part of the import bill is driven by other resources as well. The facts show that fertiliser imports surged by 30 per cent in the last two years and coal imports have doubled,” which affect the exchange rate.
Will the rupee still drop? Has it bottomed out? Ahamed says, “Rupee will strengthen in the medium term, because we see the real green shoots in the Indian economy and the inflation being teamed by the Reserve Bank of India, so it is a good time to send money back home.”
Barua does not see the rupee as somewhat oversold. “Weak growth prospects as well as falling inflation could however continue to create the macro conditions for further policy easing and we expect the RBI to resume its policy easing in July with a 25bps repo rate cut. This could be followed by another 25‐50 bps of repo rate cuts for the remainder of 2013,” he said.
Ahamed says although it is good for exchange houses, depreciation of rupee remains a concern for Indians, in general. “It is a cause of concern for policymakers, experts, investors, businessmen and even the common man. The depreciating rupee raises the price of imports. India mainly imports crude oil, fertilisers and gold. This, in turn, has a domino effect on cost of living and inflation,” he says.