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Will Indian rupee hit 21.25 against UAE dirham this year?

Rates will be impacted by local elections in India, the Ukraine-Russia crisis

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Interest rate hikes by US Federal Reserve, local elections in India, the Ukraine-Russia crisis as well as global crude oil prices will strongly influence the Indian rupee in the first half of 2022.

Economists and foreign currency exchange officials suggest that the rupee could face a rough ride in the first six months of the year, likely to trade in the range of as low as 21.25 per cent and as high as 19.6 against the UAE dirham in the first six months of this year.

The rupee witnessed some volatility in the past few months, falling to as low as 20.75 on December 16, 2021, before recovering to Dh20 on January 13, 2022. The trend reversed yet again with the rupee falling to 20.6 on February 16. But since then, it recouped some of the lost ground and was trading at 20.33 on February 20, according to xe.com.

“The rupee is likely to trade in the range of 19.70 to 21.10 in the first half of the year. The rise in US interest rates will be a positive for UAE dirham since it is pegged to the dollar,” says Vijay Valecha, chief investment officer at Century Financial.

Mohammed Shaheen, CEO, Seven Capitals, sees the rupee not dropping beyond 78 against the dollar (or 21.25 versus dirham) and could strengthen to 72 (19.61) in the coming months.

While LuLu Exchange foresees the rupee moving between 73.60 and 76.60 against the greenback (19.85 to 20.85 against Emirati currency).

Influencing factors

A LuLu Exchange spokesperson said Fed rate hikes, upcoming elections in India Ukraine crisis will dictate the rupee.

US investment bank Morgan Stanley expects Fed to hike rate six times in 2022 due to hotter-than-expected inflation data in the world’s largest economy.

Vijay Valecha added that the latest Reserve Bank of India’s monetary policy also surprised market observers by holding rates instead of hiking them. On the other hand, the US is set to embark on an aggressive rate hike path, hence, the monetary divergence between US and India means the rupee will face a rough first half in 2022, he added.

“In addition, the election results of India's largest state, Uttar Pradesh, could also influence investor behaviour. A favourable result will be seen as an endorsement of the government and will boost the rupee. The vice versa is also true.”

Mohammed Shaheen noted that inflow of foreign funds, reduced geopolitical tension and an expectation of stable government post elections will strengthen the rupee but the escalating geopolitical tensions between Russia and Ukraine is likely to force investors to seek refuge in the greenback's safe-haven appeal.

Remittances to India

As a result of the recent weakness in the rupee, 2022 has started on a good note in terms of remittances to India.

“It has been a reasonably good start to the year, and we are seeing February register better growth figures than January,” LuLu Exchange added.

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India was the world's largest recipient of remittances with $87 billion in 2021.

“The strong global economic recovery means India will be getting more remittances this year. With strong demand for Indian talent and human resources in the current global economic scenario, the upward trend in remittances is likely to continue in 2022 and this year the number is forecast to grow to $89.6 billion,” added Valecha.

Mohammed Shaheen of Seven Capitals noted that the volume of money transfers to India increased due to the currency fluctuations witnessed over the past few months.

However, with the rupee getting stronger as compared to the last quarter of 2021, Shaheen sees remitters adopting a wait-and-watch approach.

-waheedabbas@khaleejtimes.com

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