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Rupee rolls to cheer up remittances
The rupee's depreciation in the past few weeks should bring cheer to the millions of Indian expatriates in the Gulf.
- By Geetha Bhaskaran, Special to Gulf News
- Published: 00:10 March 15, 2008
The rupee's depreciation in the past few weeks should bring cheer to the millions of Indian expatriates in the Gulf. The decline is expected to continue in the coming months as turbulent stock markets and a widening trade deficit take their toll.
The rupee has weakened more than two per cent against the dollar so far this year, pressured by equity outflows and a severe shortage of spot dollars in the market. Curbs on foreign borrowing imposed by the government last year and the global credit woes caused by the US subprime crisis have also cut inflows.
After gaining more than 12 per cent in 2007, the rupee has fallen to around 40.5 per dollar, its weakest since mid-September and farther away from a near 10-year high of 39.16 in November.
"The rupee is headed towards 41 in the short term," said forex trader Ravi Menon. "Record high oil and rising commodity prices will put more downward pressure on the rupee."
India, which imports 70 per cent of its oil requirements, paid $7.7 billion for crude purchases in January, government data showed, compared with an average $5.1 billion a month in 2007. With oil shooting above $100 a barrel, import costs are set to rise further.
The country's trade deficit swelled to $9.4 billion in January, more than three times larger than in the same month a year earlier. Goldman Sachs said the deficit would widen in the coming months as exports slow due to sluggish external demand and high local interest rates while imports expand at a robust clip.
"The rupee should trade between 41 and 42 this year," Sundeep Bhandari at Standard Chartered Bank told CNBC-TV 18 channel last week.
Jairam Nair, a bank executive in Muscat, said a weaker rupee would be a boon to the Indian expatriates in the Gulf.
"Every month in the past two years the riyals I sent home had dwindled in value when converted into rupees," Nair said. "It was a painful revelation. An easier rupee should restore some parity."
Market turmoil
The rupee's easing trend started in February when an Indian unit of Emaar Properties withdrew its $1.8 billion initial public offer (IPO) because of stock market turmoil.
Foreign investment in IPOs was a major support for the rupee in January, when Reliance Power raised $3 billion within a minute of its opening.
In February, US investment bank JP Morgan lowered its forecast for the rupee to 40 by March 31 from its earlier projection of 38.5.
"Continued US recessionary risks are unsupportive of Indian rupee strength," it said in mid-February report. "Capital flows are unlikely to match last year's elevated levels owing to a marked deterioration in risk appetite."
Foreign funds have pulled more than $3 billion out of Indian shares this year, and the outlook remains clouded by uncertainties. Slowing economic growth, the government's reluctance to push reforms ahead of national elections and the benchmark Sensex share index's 25 per cent tumble from its high in January have spooked investors.
The rupee's weakness has contributed to the wobbly stock market, and could weigh on the outlook, analysts said.
Foreigners had moved a large portion of money into Indian shares to take advantage of arbitrage opportunities between the cash and futures markets, rather than for fundamental reasons like growth, Ishtaj Rahman, executive director of Baer Capital Partners, says.
"These strategies have come under pressure as the upward momentum has waned and the rupee has weakened against currencies such as the yen," he wrote in The Economic Times.
In mid-2006, the stock market fell 30 per cent in about a month, but then rebounded with the strengthening rupee helping to attract more foreign investment. If the local currency appreciates after an investment is made, it gives the investor a bonus when he repatriates profits as he would have to give fewer rupees to get as many dollars.
"Today, the case for a strong rupee is much more tenuous, with the currency in fact poised for further weakening," Rahman said.
The gloomy outlook for the US economy will have an impact on India, although the country's economy is mainly driven by domestic demand.
The Federation of Indian Export Organisations expects exports in 2007-08 to fall short of the government's target of $160 billion. The government expects GDP growth of 8.7 per cent in the current fin-ancial year that ends on March 31, slowing from 9.6 per cent in 2006-07 and 9.4 per cent in the previous financial year.
The rupee will decline to 40.70 by the end of this month, 41.30 by June 30 and 42.50 by September 30, Callum Henderson, Singapore-based head of global currency strategy at Standard Chartered Plc, told Bloomberg News.
"There's a sell-off happening in currencies with current-account deficits and the record oil price certainly isn't helping the rupee's case," he said. "A US recession is going to have some impact on India's trade balance."
However, the long-term outlook for the rupee is bullish because India's $1 trillion economy, Asia's third-largest after Japan's and China's, will maintain robust growth of more than eight per cent annually.
This pace of expansion will be second only to China's among the world's major economies, and should attract larger foreign investment in the years ahead as opportunities open up for bigger profits.
A further fall in Indian shares, which gained more than 45 per cent in each of the past four years, could make them bargain buys and pull in foreign investors again, analysts said.
"We're not out of the woods," said portfolio manager P.N. Vijay. "But a correction may not be too far away."
For foreigners with more than a one-year horizon, the weaker rupee should help at the time of investment.
Engineered
Other analysts believe the rupee's easing was engineered by the Reserve Bank of India (RBI), which bought dollars heavily through 2007 to slow the unit's appreciation as it squeezed the margins of export-focused companies like software and textiles.
Ila Patnaik, a senior fellow at the National Institute of Public Finance and Policy, says the rupee's decline in February came even as India's foreign exchange reserves jumped by $11.7 billion during the month to a record $301.2 billion.
"This suggests that the depreciation of the rupee was engineered," she wrote in The Indian Express on Wednesday, arguing the rise in reserves could not have come from the revaluation of other currencies or gold against the dollar.
She said the hefty US rate cuts were drawing cash into higher-yielding Indian assets. India's benchmark lending rate at 7.75 per cent against the Federal Reserve's three per cent offered a 4.75 percentage arbitrage opportunity for foreign investors.
"Interest rates in India are higher and if the rupee was also going to get stronger, dollar returns would be even higher," Patnaik wrote. "In this situation, the RBI may have tried to break the one-way bet by pushing the rupee to depreciate."
Will the rupee's decline be short-lived?
"Not in the near term," said forex trader Menon. "Our import bill is going to rise sharply and this will keep the rupee under pressure this year."
- The writer is a journalist based in India.
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