Indian rupee, Indian currency
Remit or hold? Indian rupee is expected to drop further against the UAE dirham this week. Image Credit: Pixabay

Dubai: The Indian rupee recorded remittance-beneficial rates against the US dollar and the UAE dirham these past days, and forex analysts are flagging further currency weakness this week, giving hope to those looking to remit money back home.

The value of the currency stayed weak on Monday at Rs20.79. Check the latest forex rates here. The Indian rupee has been under pressure exerted by high oil prices, and the resultant inflationary pressures in the country.

India's low macro-lending rates to prop-up growth as well as rising trade deficit on the back of expensive imported commodities is expected to keep the Indian rupee subdued in the short-run.

Accordingly, the low macro-lending rates have pushed bond yields higher and stroked further inflationary fears, thereby, hurting rupee's prospects.

How lending rates, trade deficit drives inflation higher
Lower rates and reserves held by banks would likely lead to an increased demand for borrowing at lower rates, and banks would have more money to lend. The result would be more money in the economy, leading to increased spending and demand for goods, causing inflation.

A country's importing and exporting activity can influence its GDP, its exchange rate, and its level of inflation and interest rates. A rising level of imports and a growing trade deficit can have a negative effect on a country's exchange rate.
Indian rupee
Rupee is expected to weaken a bit further as the central bank (RBI) has chosen to support growth and kept rates unchanged: analysts

Inflationary fears

"Rupee is expected to weaken a bit further as the central bank (RBI) has chosen to support growth and kept rates unchanged," said Sajal Gupta, Head Fx and Rates at India-based Edelweiss.

"Other factors such as high domestic and US bond yields, along with a rise in crude oil prices, higher trade deficit and lower economic growth forecast are all supporting this trend."

On the other hand, Gupta added that a weak rupee will help the country's exports to attain higher growth. Last week, the rupee closed at 76.18 to a greenback.

Weakness in the rupee's value against the US dollar will be automatically reflected in its exchange rate with the UAE dirham as the UAE currency is pegged to the dollar.

Rupee to drop more

According to Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities: "Indian rupee is likely to weaken further next week as crude oil price surged on geopolitical worries. Foreign fund have been aggressive sellers of Indian equities and that is also a major sign of worry."

"The US Federal Reserve is likely to raise interest rates 50 bps in May and also begin shrinking its balance sheet. RBI will lag the US central bank and likely to raise rates in June. This policy divergence will lead to rupee depreciating further."

Vakil expects the USD-INR to head north with resistance placed at 76.50 while on downside it likely to hold support around 75.70 to a USD. In addition, Gaurang Somaiya , Forex and Bullion Analyst, Motilal Oswal Financial Services said: "Market participants will watch out on how global crude oil prices behave as it rebounded from recent lows."

"Broader dollar strength is likely to keep the rupee weighed down and we expect the USD-INR (spot rates) to trade sideways and quote in the range of 75.70 and 76.50."