With the Indian rupee appreciating almost 9 per cent in the
past nine or so weeks, Indian expats in the UAE and elsewhere have been
on the receiving end of the foreign exchange fight, with the dollar (and
therefore the UAE dirham) getting clobbered by the now mighty rupee.
Today, one UAE dirham is fetching about Rs13.2 compared with Rs14.62
that it fetched on December 15, 2011, a decline of 8.9 per cent in a
little over two months. While last year, the Indian rupee was among the
worst performing currencies in the world – declining by 18.7 per cent in
12 months – the Asian currency has gained a lot of traction since the
beginning of 2012.
In a nutshell, Gulf expats remitting money have been receiving lesser
mileage from their dirhams, dinars and riyals, with most having to
remit more of their hard-earned cash to meet fixed exposures in their
home country.
However, despite the fact that the rupee has had a decent run in the
past 67 days, analysts believe that the rally will, sooner than later,
lose steam and that the dollar (and therefore the dirham) may once again
trump the Asian currency in coming weeks.
According to Abhijit Chakraborty, Senior Vice-President of
Institutional Equity at India-based Fortune Equity Brokers, the rupee
could once again fall to below 51-52 levels against the US dollar –
i.e., one UAE dirham might soon fetch more than Rs14.15 again.
“I think the rupee carry trade, which was essentially driven by
liquidity factors, had taken the market up… I think that is going to
take some pause, dollar index could revert back to about 80-81 and rupee
could once again go to 51-52 levels,” Chakraborty said in a televised
interview with CNBC-TV18, an Indian business news channel.
“The local unit [rupee] should soon witness some weakness towards 50
[against the US dollar], as the continuous increase in the crude prices
will severely affect our current account deficit which is already
expected to be at 3.5 per cent of GDP by March 2012, the worst in the
last eight years,” adds Abhishek Goenka, CEO of India Forex Advisors, in
a column in an Indian business daily.
With the oil price hovering close to $120/barrel, his comments may be
bang on track in predicting an impending weakness in the Indian
currency. Indeed, the rupee might be flattering to deceive as a
reasonable share its recent strength is due to unsustainable factors.
The rupee’s appreciation is being credited to a huge sway of
investments made by foreign institutional investors (FIIs) as well as
non-resident Indians (NRIs) who seem to be taking advantage of the
recent changes in regulations resulting in Indian banks offering them
some of the highest interest rates in over a decade.
Besides the increase in NRI deposit rates that has reportedly
resulted in a sharp increase in inflows, FIIs have pumped in more than
$7 billion in the Indian markets since the beginning of the year. Both
these factors are likely to slow down.
“Flows of this magnitude in the local markets do not seem sustainable
on a month on month basis,” agrees Goenka. And if that is correct,
expect more than Rs14 for your dirham sooner than later.
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