Indian rupee erosion has NRIs foxed

Currency woes may worsen

Dr Merwyn Strate

Global Professor, Hult International Business School

Bloomberg reported late Wednesday afternoon that India’s rupee plummeted the most in two decades to a record low of 68.31 per US dollar, as a surge in oil prices threatened to worsen the current account deficit and push the economy toward its biggest crisis since 1991.

Stocks and bonds have also plunged on all Indian bourses in response to the worsening situation in Syria. They go on to report that an 8.9 per cent jump in Brent crude this month is set to boost costs for India, which imports almost 80 per cent of its oil.

Prime Minister Manmohan Singh won a rare victory by passing a landmark food bill, a key plank of his party’s re-election strategy. The plan involves spending about $18.3 billion in subsidies each year, potentially worsening the fiscal gap.

The impact on NRIs who remit rupees to India that are earned in non-rupee currencies is fairly obvious. For example, at today’s rate of Rs68.31 per US dollar (with the UAE dirham being pegged to the dollar) compared to the rate of Rs43.65 per dollar for this same day in 2008, the difference is almost 57 per cent. This means that an Indian expatriate in Dubai can purchase almost 57 per cent more rupees today than they could just 5 years ago. This may be an oversimplification as there are complex and dynamic relationships between the cost of living, budget deficits, global fiscal policies and, in this case again, tension in the Middle East impacting oil prices.

In my opinion, the situation will continue to worsen until India reins in their budget deficits, reduces its imports of oil (and other commodities) and the global markets increase their purchases of Indian produced goods and services.

In the meantime, non-resident Indian earnings in countries with stable or strong currencies will continue to hold their assets outside of India or remit to India at increasingly higher exchange rates. This is great for non-resident Indians for the time being, but spells certain financial hardship for resident Indians, as prices for them will surely rise with this imbalance of currency flows and valuations.

Downfall a cash bonanza for NRIs

Arindam Banerjee, Assistant Professor of Finance at S.P. Jain

The rupee’s fall is not something which is very specific to India. Any country’s currency that is attached to the dollar is under a similar pressure, simply because the various economic measures of the US demands more dollars as a result of which investors are withdrawing their dollar investments from these countries which include India and taking their dollars back to the US. This further means the value of the Indian rupee against US dollar is falling as the demand for dollar continues to go up.

For an NRI, in simple terms it means getting more Indian rupees per unit of your foreign currency, and UAE dirham is one of them. This is the most profound benefit of the falling rupee. It can be beneficial for new real estate investors because they would be paying lesser of their foreign currency.

At the same time, it impacts negatively for families of those NRIs back home who would be paying in dollars. For example, current and prospective students who would like to study abroad, importers who would invoice their bills in dollars and couples who plan for a foreign honeymoon.

It is yet to be seen what sustainable measures the Reserve Bank of India takes to control the rupee fall. As we have seen in the recent past, the government measures like increasing interest rates have not prevented the flight of US dollars from India.

Rupee’s fall not an isolated event

Dr T. P. Ghosh

Professor of Finance, Institute of Management Technology, Dubai

The dramatic fall in the Indian rupee has now escalated way beyond what should have been on the worry of widening current account deficit, and it is in a hurry to cross the psychological level of Rs70 per US dollar. Arguably, market reacted adversely on sheer disbelief that India could afford food security taking risk of creating bigger hole in its vulnerable fiscal deficit. But the market will slowly digest that economic foundation cannot be built on hunger, poverty and social unrest.

Now, the Indian slowdown has cast its long shadow on the currency market, equity market and bond market. Although the Reserve Bank of India (RBI) does not have adequate means to lean against the wind by market intervention, mortgaging gold is an emergent option to bridge the gap of balance of payment. Already NRI interest rate in India has been increased for a deposit of three years or more. Strong NRI flows could stabilise the currency. India should resort to black money amnesty scheme. It should give tax incentives for FDI in order to make it more attractive.

Currency swap arrangements with China, Japan and the European Union are also a strong alternative to stabilise rupee. Interestingly, it is an opportunity to the UAE banking sector to take advantage of the interest rate arbitrage arising out of the weak Indian rupee.

It could reduce the interest rate to 0.50 per cent per month, which would raise dirham-rupee arbitrage to 3.5 per cent in the context of the recently enhanced NRE deposit rate of 9.5 per cent.

One essential precaution will be whether rupee will bottom out at 19-20 per dirham with India bracing for general elections. If rupee settles around your remittance level, you gain time value. If it settles back at a lower level, then you are better off by market timing. However, borrowing beyond means by NRIs is not a good idea. Leveraged arbitrage should not be a debt trap.

Compiled by Muaz Shabandri