Rupee hike to hit NRI remittance

DUBAI — The remittance power of Indian expatriates working in the Gulf is poised to suffer further setbacks with a predicted rise in the value of Indian currency after the Reserve Bank of India (RBI) meets on April 29 to decide on interest rates.

By Issac John (Deputy Business Editor)

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Published: Sat 19 Apr 2008, 10:10 AM

Last updated: Sun 5 Apr 2015, 11:41 AM

With the RBI widely expected to raise the interest rates of the rupee in an attempt to check India’s spiralling inflation, the currency of Asia’s third largest economy is poised to strengthen further against the dollar and Gulf currencies pegged to the plummeting greenback, monetary experts warned. The rupee appreciated around 12 per cent against the dollar in 2007, and has gained another 1.5 per cent since the start of the year.

Dr Jayaram Nayar, Director of Post Graduate Studies at the College of Banking & Financial Studies in Oman, said the tactical move by the RBI to fight inflation will strengthen the currency while making it more attractive to global investors in the currency market.

“I would feel that earlier remitters would be at an advantage as I expect the Indian rupee to appreciate at an accelerated pace as a consequence of the upward interest rate revision.”

Speaking to Khaleej Time, Nayar said with the dollar still headed south, the more affluent NRIs may see the Indian rupee as a safe haven or at least as a temporary parking space until the international financial markets stabilise.

“The rupee would also be supported by the fundamental strength of the economy on account of any fall in oil prices as the dollar outflow would be reduced while any reduction in oil prices would reduce input costs of a booming economy. Overall, in the immediate future I see the rupee headed north all the way. Send your money sooner than later.”

The International Association of Money Transfer Networks said remittances from the UAE to India grow by 20 per cent per annum. According to World Bank, 10 million Indian expatriates in the Gulf region sent home Dh264.4 billion in 2007.

In a forecast, Morgan Stanley said the Indian currency would appreciate further to reach the level of Rs36-37 per dollar by the end of 2008. Morgan Stanley’s Managing Director Jonathan Garner believes that the long-term capital inflow and India’s growth would result in appreciating Indian rupee over the period.

“Exchange rate appreciation is happening in many emerging Markets and not in India alone,” Garner said.

RBI Governor Yaga Venugopal Reddy, whose board has kept the benchmark interest rate unchanged at 7.75 per cent since March 2007, is seeking to slow inflation from a record high, while supporting the economy as global demand slows. RBI is expected to raise the rate by 0.25 percentage point at its April 29 policy meeting and another 0.25 per cent within months.

“Diverging forces on the rupee will likely leave limited movements for the currency in the days leading up to RBI’s policy meeting on April 29,” currency analysts said. “The RBI’s reaction to inflation will be revealed at the April meeting and will determine the rupee’s road,” they added.

Dealers said high inflation, exceeding seven per cent, and crossing the Reserve Bank’s tolerance level, provided underlying support to the Indian currency.

“Speculation is rife that the central bank will allow appreciation to temper inflation which is unacceptably high.”

Asia’s third-biggest economy expanded 9.6 per cent in the financial year ended March 2007. The government estimates growth at 8.7 per cent in the year ended on March 31 as export expansion slows. The current account deficit widened to $5.4 billion in the fourth quarter from $4.7 billion dollars the previous quarter, the RBI reported on March 31.

Analysts said if there is no tightening of interest rates, it is seen as a sign that the RBI is putting growth before inflation, a trigger for rupee to head downhill. “If RBI shows its inflation fighting credentials, then the rupee could head uphill.”

Finance Minister P. Chidambaram said on March 28 that India may decide to “give up growth” to curb inflation. The rupee remained below Rs40 on Thursday compared to above Rs48 per dollar some years ago.

Goldman Sach, in a research note, said the RBI will encourage rupee gains and raised its forecasts for the currency. It now expects the rupee to climb to 39.30 a dollar in soon, from an earlier forecast of 40.

Dollar-rupee rate broke below the psychological support level at 40 on September 20, two days after the US Federal Reserve triggered a global sell-off in the US dollar with a 50bps cut in the Fed Funds Rate to 4.75 per cent. By October 11, the rupee had strengthened to 39.275, its strongest since 1998. Since then, exchange has range-traded between 39.27 and 39.96, dealers pointed out.

“Like other Asian currencies, we expect the rupee to strengthen against the dollar heading into the US presidential election in 2008. But that’s not why we are upgrading the forecast. We like the rupee because of India’s stronger fundamentals vis-a-vis the US. Some of the positive factors include higher interest rates with a tightening bias, a strong balance of payments aided by foreign direct investment and an improving fiscal position that could lead to more upgrades in sovereign debt rating.”

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