NRI alert: Indian rupee likely to hit 20.7 versus dirham
Planning to remit money? Hold it. The rupee is likely to weaken in the months ahead.
If you’re a Non-Resident Indian (NRI) and looking to remit a large volume of funds to your home country, hold it for now because the rupee is likely to weaken in the months ahead, and likely to fetch a better conversion rate.
According to a new study by Geneva-based Pictet Wealth Management, the rupee is projected to drop by around 4.5 per cent over the next 12 months from the current price to hit 76 against the US dollar, or 20.7 versus the UAE dirham.
The Indian rupee was trading at 72.74 against the greenback (19.8 versus dirham) on Wednesday, according to alexa.com. Pictet Wealth projects Indian currency trading at 74.5 in three months, 75.5 in six months, and 76 in 12 months.
The rupee outperformed most of the other emerging market currencies from the start of the year until well into March. But at the end of March, the sharp deterioration in the Covid-19 situation in India led to downward pressure on the rupee.
But the South Asian currency made a good recovery in the past month, notably because the Indian government resisted imposing a national lockdown, which would have had a dire impact on the Indian economy. The currency has risen from 75.4 on April 22 to 72.7 on May 26.
Luc Luyet, the forex strategist at Pictet Wealth, said high inflation and the already large amount of liquidity in the system limit the ability of the Reserve Bank of India (RBI), the country's central bank, to intervene much further on the spot market.
Despite the RBI’s large dollar purchases in recent months, Luyet said the central bank would not tolerate excessive rupee weakness because of the risk of stoking imported inflation.
“Given its large forex reserves, the RBI has enough firepower to smooth any decline in the rupee. Indeed, March saw the RBI selling some of its forex reserves,” added Luyet.
“Overall, we would not expect the rupee to appreciate much further, as capital flows are likely to decline in the coming months, especially if the fall in Covid-19 cases is slow and weighs on economic recovery. At the same time, we see limited scope for a significant depreciation of the rupee in light of elevated inflationary pressure. Our projections for the USD/INR rate are INR74.5 in three months, INR75.5 in six months, and INR76.0 in 12 months,” said Luyet.
Pictet Wealth said inflation in India will remain relatively high – most likely above the RBI’s four per cent inflation target and perhaps even close to the top of its tolerance band of six per cent.
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