The battered Indian rupee made a fresh lifetime low of Rs16 against the UAE dirham (Rs58.80 against the US dollar) at 9:35 UAE time (5:35 GMT) in early trade on Tuesday following what the market expects to be a robust US economic recovery, leading to a curtailing of its famous quantitative easing programme, coupled with weakening fundamentals of the Indian economy.
Slow economic growth, a high rate of inflation, sluggish exports, mounting imports, and Indians’ penchant for gobbling up gold at whatever price… a combination of factors is fuelling persistent dollar demand from Indian importers and banks.
A number of foreign institutional investors have reportedly begun pulling out their investments from the country’s capital markets back into the ‘safe again’ American markets, which will further deteriorate the situation in India.
The rupee has been under consistent pressure due to a rising dollar and India’s own economic woes, and the country saw its current account deficit bloat to $17.8 billion in April despite a slew of recent measures initiated by India’s finance ministry, including an effective 8 per cent tax on gold imports to dampen the precious metal’s appetite among the country’s citizens.
Analysts warn that deteriorating economic indicators in India, which saw its current account deficit bloat to $17.8 billion in April, will further chip away the rupee’s worth in the near term unless the country’s central bank, the Reserve Bank of India (RBI), intervenes in the market.
However, with analysts expecting the country’s deficit to have further deteriorated in May to $20.8bn (official data is yet to be released), any intervention by the RBI might be short-lived.
A section of experts believe that now that the rupee is in uncharted territory, it could fall to as low as Rs60 against the US dollar – or Rs16.33 against the dirham – in the next couple of months.
Indeed, it is time for non-resident Indians (NRIs) to look at options to maximise this favourable remittance window, which may or may not last long. In the past 18 months, the rupee has traded in a wide range against the dirham – from Rs13.23 on February 5, 2012, to Rs16 this morning.
One dirham fetched Rs14.96 on January 1 this year – in other words, NRIs earning in US dollars (or dollar-denominated currencies such as the dirham, riyal or dinar), have got a salary hike (in rupee terms) of 7 per cent since the beginning of the year, and an even steeper 21 per cent since February 5, 2012.
But as every expatriate knows, this gain is only notional – after all, we spend a majority of our earnings in the currency we earn and in the country we earn it, and only remit perhaps a small proportion of our income every month. So, obviously, it is that small proportion that has gained – not the entire income.
Still, a falling rupee – hurts as it does India’s economy as imports into India become expensive – is an opportunity for NRIs to benefit from the most favorable exchange rate ever.