The NR EYE: NRIs may leverage rupee rate, high deposit yields Thursday, 10 February 2011 23:55

by Moiz Mannan

The Egyptian crisis and high oil prices at the global level coupled with the ever deepening 2G scam and adverse reports on the Anil Dhirubhai Ambani Group on the domestic front have cast gloom on the Indian bourses. Correspondingly, the Indian Rupee appears treading on the path to further weakness.

At such a time, non-resident Indians would surely not be too enthused about investment remittances.

Already, the high prices, particularly food inflation, had taken some steam out of the Indian markets which, until recently, had been scaling one high after another. This week the stock indices feel to their lowest levels in more than seven months. Over the past few months India’s central bank, the Reserve Bank of India (RBI) has had to repeatedly raise interest rates in an attempt to control the inflationary trends.

In its 12 month forecast for the Indian Rupee, ForecastChart, says that the exchange rate for the Indian

Rupee will be roughly 48.10 Indian Rupees to the US Dollar. According to the forecast, the February, 2012 currency exchange rate could easily fall between 51.55 and 44.64 INR/USD.

The Indian Rupee exchange rate for January, 2011 averaged 45.38 INR to USD. That’s 27.5 basis points higher than the December, 2010 rate of 45.10, and 52 basis points lower than the January, 2010 rate of 45.89. The minor movement in the INR/USD exchange rate from December to January provides evidence that the short term trend in INR/USD is relatively flat. If that trend continues in the currency market, we should see an average daily rate in February, 2011 that is close to 45.65.

The average Indian Rupee conversion rate over the last 12 months was 45.61. The average rate over the last 10 years was 45.54. The minimal change in the Indian Rupees to dollars exchange rate over the last 12 months compared to average conversion rates over the last 10 years serve as an indicator that the long term trend in INR/USD is relatively flat.

The highest currency rate for INR/USD over the last 12 months was 46.76. The lowest was 44.36. The market high was attained in July, 2010. The market low was achieved in October, 2010.

ForecastChart.com’s historical research covers Indian Rupee data back to January, 1973. It is very interesting to note that the average exchange value during that period of history was 26.20 INR/USD. The highest rate was 51.13. The lowest was 7.27. The market high was attained in March, of 2009. The market low was achieved in June of 1973. Recent rates experienced in January of 2011 are high relative to the historical 26.20 average.

As against a strong rupee in 2010, the Indian currency has depreciated by more than 2.3 per cent vis-à-vis the US dollar this year, according to US investment bank Goldman Sachs. “We continue to believe that the rupee will weaken against the dollar to sustained high current account deficits and weaker balance of payments. Our 3, 6, 12-month USD/INR forecasts remain at 46, 46.2 and 47, respectively,” said a Goldman Sachs report.

In this scenario, NRIs would surely want to put their investment remittances on hold to allow the situation to settle a bit. “With the way currencies are fluctuating at the moment, we are seeing people hold back their money until the rate looks more stable,” Marc Aubry, marketing director for MEA at Western Union, was quoted by Kippreport as having said. The company has 1,300 agents in the Gulf.

“For example,” he added, “the Indian rupee is really up and down. “As a result, people who used to send money home on a monthly basis are now sending it every two or three months.”

Family remittances, though, would continue and even rise as the rupee declines further as their host currencies would afford them a higher buying power of the home currency. Having said that, we must add that when their families do actually use that remitted money, the domestic inflation takes over and negates much of the exchange rate advantage.

If at all, then, NRIs may take advantage of the RBI’s supposed cure for that very same inflation by raising the interest rates. Both private and public sector banks have been hiking their term deposit rates in accordance with RBI guidelines. Bankers, therefore, expect more NRI remittances to flow into the Ordinary Non- resident Rupee (NRO) accounts.

These accounts now promise returns of 9 to 10 per cent, which even after deducting the income tax on yields, appears lucrative under the circumstances.

THE PENINSULA