Why the Rupee is falling; how NRIs can gain
The rupee slid to an all-time low of 52.73 against the US dollar, November 22
The Indian rupee is in free fall, having slipped by over 15 percent this year making it the worst performing currency in Asia, and the
third worst globally.
The currency slid to an all-time low of 52.73
against the US dollar, November 22, but bounced
back by over a percent a day later due to suspected intervention by the Reserve Bank of India.
Traders said the RBI intervened (meaning, sold
dollars) to the tune of $2.5 billion to 3 billion since
the rupee touched all-time lows, though RBI
Governor D Subbarao declined to confirm this.
The general perception amongst experts is that
until the global macro-economic environment stabilizes, the rupee will continue to be under pressure, as investors the world over flock to safer cur-rencies like the dollar.
Why is the rupee falling against the dollar?
1. The main reasons behind the fall of the rupee
are an increased demand for dollars due to a spurt
in crude oil prices and the flight of foreign funds
from the Indian market. Demand for rupees, simultaneously, has dipped because capital inflows are down.
2. Foreign institutional investors are believed to have sold
Indian equities worth more than $500 million in just a few
trading sessions. The rupee has been under tremendous
pressure as foreign investors are getting out of the Indian
markets due to the current slowdown in the nation’s economy and rising global uncertainties.
And this is not good news for markets like India.
Historically, the Indian equity market has shown a strong
positive correlation with the rupee movement. So, it is not
surprising that the market has fallen in recent times as the
rupee depreciated — it is down 10.6 percent since August 1.
3. The 2008 global financial meltdown did relatively little
damage to India’s economy and the country kept logging
impressive 8-percent-plus growth rate. However, lack of
notable economic reforms, a perception of policy paralysis,
rising number of scams, slowing manufacturing and agricultural growth, rising interest rates and unbridled inflation
are taking the steam out of the Indian growth story.
4. The growing Indian trade deficit and the large fiscal
deficit are also contributing to the fall of the rupee.
5. Higher price of imported goods, especially crude oil
that is now ruling at over $100 per barrel, has also led to an
increase in domestic inflation and a fall in the value of the
Indian currency. Oil refiners are amongst the biggest dollar
buyers in the Indian currency market and the demand especially is at the high towards the end of a month as they make
the payments for their imports.
6. High inflation and a strong growth in the Indian economy have already forced the RBI to raise interest rates.
What the RBI has done to prop up the rupee
1. The regulator has stepped up its surveillance with banks
to keep a check on speculative activity by market participants.
2. It has relaxed external commercial borrowing norms by
raising the ceiling for interest rate the Indian corporate sector pays to raise overseas funds.
3. It has increased the interest rate cap on foreign currency deposits.
4. It removed the $100 million cap on net foreign exchange supply arising out of rupee swap transactions that
banks undertake on behalf of customers. In a foreign exchange swap, a bank executes a spot and a forward transaction
simultaneously for identical amounts to offset each other.
5. The RBI also increased the interest rate cap on non-resident (external) rupee deposits and foreign currency nonresidential (bank) deposits. All the moves were aimed at
increasing dollar liquidity in the market.
6. Market participants also expect the RBI to open a sep-
arate window to meet the dollar demand of oil companies,
chances that the Indian stock market
may fall further opening up even more
which would ease pressure on the
RBI deputy governor Subir Goka-rn said the central bank would intervene to check the sharp movements
in the rupee and prevent a downward spiral in its value, but would
balance it with the need to retain
reserves in the event of prolonged
7. In order to attract more flows in
foreign currency deposits, the RBI
has raised the interest rate ceiling.
The spreads for NRE term deposits
were increased from 1.75 percent to
2.75 percent, while those on
FCNR(B) deposits were increased
from 1 percent to 1.25 percent.
How NRIs could benefit from the
fall of the rupee
While the falling rupee is not good
news for the Indian economy, as
imports into the country are now
more expensive, for NRIs it opens up
a new vista to make a quick buck.
With Indian interest rates already
at peak levels, it makes eminent
sense for the NRI to invest in the
NRE/NRO account to make the most of it. Since the US
dollar now goes farther, vis-à-vis the rupee, than it has ever
before, and the interest rates too at very high levels, the
NRIs stand to gain a lot by investing in India.
Since interest rates are high, Indian banks are also offering higher deposit rates on safe, fixed-income plans. So,
NRIs can really make their remittances count and earn
them a higher packet.
Some NRIs have bought real estate in India and are making mortgage payments on that. With the dollar ruling high,
it is a good time for NRIs to try and prepay their housing
loans in India.
Since the dollar now goes much farther, it might even be
a good opportunity for NRIs to invest anew in the Indian
real estate market. Property prices in Indian cities have
been on a constant rise and there is little likelihood in the
near future for a crash in the market as demand for housing
in the metro cities is outstripping supply.
The Indian stock markets are now slipping due to the
Euro debt crisis, slowing economic engine, rising inflation
and other accompanying woes, the price of shares are at
attractive levels. It would seem like a good time to buy
shares when they are priced so low, although there are