What a weak rupee means for Indian residents in the UAE

The currency's depreciation over the past six months and the beginning of the festive season are expected to drive double-digit growth in remittances

Indian residents in the UAE are expected to capitalise on the favourable exchange rate after the rupee hit a new low against the dollar. Victor Besa / The National
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Indian residents in the UAE are expected to capitalise on favourable exchange rates to send money home after the rupee hit a record low against the US dollar this week.

Praveen Menon, a Dubai-based overseas manager for an Indian property developer, is one of them. He remits about 20 per cent to 25 per cent of his UAE salary every month to India, but plans to increase this amount.

“When the rate is attractive, I always remit bulk amounts from the UAE to finish an existing commitment in India such as a personal loan or a mortgage,” he says.

“However, it is best if Indians based overseas do not remit money to invest in a fixed deposit because its value gets eroded. I would recommend using the money for an investment or convert it into foreign currency, such as euros or dollars, in forex trade.”

The Indian rupee tumbled to a new low against the dollar on Monday after last Friday's US jobs report cemented bets that the Federal Reserve would continue its interest rate increase programme for the rest of the year to rein in high inflation.

The rupee was trading at about 82.30 at 2.20pm UAE time on Monday, having hit a low of 82.6825 earlier in the day.

The currency is also weakening on the back of concerns over oil prices, rising Treasury yields, corporate outflows and offshore demand for the greenback, Reuters reported.

Treasury yields and the dollar index rose on Friday and US equities plunged after the US jobs data that was considered robust enough to keep the Fed on its path to deliver another 75 basis points rate increase next month.

“The Indian rupee, as most G10 and emerging market currencies, remains under the heavy pressure of the relentless US dollar rally,” says Ipek Ozkardeskaya, a senior analyst with Swissquote Bank.

“What is driving the rupee to an all-time low is the broad-based appreciation in the US dollar, the hawkish Fed expectations that get fuelled by robust US jobs and strong inflation data, and the Fed’s determination to keep raising interest rates until inflation is on course to hit the 2 per cent policy target.”

Meanwhile, Mr Menon expects the rupee to depreciate further. He always remits money through an exchange house app as he receives a better rate digitally than the negotiated over-the-counter rate.

However, Kiran Viswam, an Indian data analyst at a UAE-based luxury retailer, has been trying to bring money to the Emirates from India to make a local investment.

Mr Viswam is worried that the volatile forex market and weak rupee will erode the amount further. Residents are at a disadvantage if they want to bring money to the UAE, he says.

“I stopped remitting money to India a few years ago since the interest rates offered by commercial banks there [are] quite low and high inflation erodes the value of the money we send,” Mr Viswam says.

“I prefer to invest in the UAE because of how currency fluctuations devalue the rupee and banks offer better interest rates here. A weak rupee is ideal if you take out a personal loan in India and pay it off using dirhams because you get more bang for your buck.”

Last week, the World Bank trimmed India’s growth forecast for this financial year by a full percentage point, as rising commodity prices and debt trouble hit economies in South Asia.

“Heading into the week, we expect the dollar index to remain firm … [The] US inflation report due on Thursday and reaffirmation of higher interest rates through Fed minutes and speeches by Fed officials are likely to keep the dollar index well supported,” HDFC economists wrote in a note.

“This implies that the rupee could remain under pressure in the near term. However, any sharp move in the pair is likely to be checked by the Reserve Bank of India.”

The US dollar should ease as the actual appreciation is toxic for the world economy and even for US companies themselves, says Ms Ozkardeskaya.

However, no one can say that the US dollar has hit a peak yet. In the mid-1980s, the dollar index was about 160, she says.

“Therefore, as long as the market remains in the hands of the Fed hawks, we may see the dollar continue strengthening, which could further weigh on the Indian rupee,” she says.

Two factors are driving down the Indian rupee: a slowdown in economic growth and the strength of the US dollar, says Naeem Aslam, chief market analyst at AvaTrade.

“The path of least resistance is skewed to the downside,” he says.

The RBI is expected to be cautious this time around as it has already spent a substantial sum to defend the rupee, says Vijay Valecha, chief investment officer at Century Financial.

In the week through to September 30, India’s forex reserves declined to $532.66 billion, the lowest since July 2020. That is an almost 16 per cent drop from $633.6bn at the start of the year, according to the IFA Global Research Academy.

The decline in forex reserves has been quite steep during the past few months, but it is not alarming as they are still deemed adequate, Mr Valecha says.

However, the central bank will now turn a “bit judicious” in using foreign currency. This could result in the rupee staying under pressure in the near term, he says.

“India has reported four successive months of declines in its consumer price index, which will improve its real rates of return. Moreover, the markets are now expecting the terminal [interest] rate of the Fed to be at 4.5 per cent by March 2023, which could be a relief for emerging market currencies,” Mr Valecha says.

“Markets are expecting a Fed pivot after that. In the near term, the rupee could slide to 83.50 against the US dollar, where we could see some RBI intervention.”

Meanwhile, remittance houses in the UAE have recorded a surge in money transfers to India. Lulu Exchange experienced a steady increase in rupee remittances, both in count and volumes, in the past six months due to the currency’s continuous depreciation, according to a representative.

“For the past six months, INR is continuously depreciating against the US dollar and has today hit an all-time low of 82.68,” the Lulu Exchange representative says.

“However, in the past one month, we have witnessed a surge, recording double-digit growth figures. The current trend is likely to continue in the near future as rising crude oil prices, high trade deficit and depleting foreign exchange reserves may further extend the slide in INR.”

As the Indian festive season has started, rupee remittance counts and volumes are also expected to increase in the near term, according to Lulu Exchange estimates.

“Some of our customers are remitting bulk amounts,” the representative says.

“At the same time, others are awaiting a further fall in INR to get better rates for sending money home. We expect the INR remittance to increase further during Diwali.”

Many customers are remitting for foreign currency non-resident deposits and we are expecting a further depreciation in the rupee over the coming quarter
Hasan Fardan Al Fardan, chief executive of Al Fardan Exchange

Al Fardan Exchange has recorded a surge in rupee remittances since the breach of USD/INR above 82 levels, with about 25 per cent growth in volumes since that date, says Hasan Fardan Al Fardan, chief executive of Al Fardan Exchange.

“Many customers are remitting for foreign currency non-resident deposits and we are expecting a further depreciation in the rupee over the coming quarter,” he says.

“The rupee, along with all emerging market currencies, are on a depreciating trend since the start of the last quarter, resulting from global pressures, increasing US interest rates, crude price, inflationary pressures and depleting USD reserves with RBI.”

Some residents are remitting in bulk but regular flows are continuing normally. Compared with the previous year, Al Fardan Exchange recorded double-digit growth in total rupee remittance volumes while high-volume transactions have grown by 24 per cent, Mr Al Fardan says.

Blue-collar workers constitute about 45 per cent of people who remit rupees at Al Fardan Exchange while white-collar professionals make up 40 per cent of the market, with high-net-worth individuals making up the remainder.

“All these segments are price sensitive, watch the market and remit only when they get best value,” he says.

“The upcoming festival of Diwali is expected to provide a further boost as this is the remitting period.”

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Updated: October 11, 2022, 8:22 AM