Dubai: If Indian expats were hoping to send more money home, it would be ideal to do so this week as exchange rates are expected to remain supportive of remittances against the US dollar and UAE dirham in the next days.
The value of the Indian rupee against the UAE dirham was at 21.51 on Monday and 79 against the US dollar – with analysts expecting a bigger drop. Check the latest exchange rates here.
The weakness in the value of the rupee against the US dollar will automatically be reflected in its exchange rate with the UAE dirham, as the currency of the United Arab Emirates is pegged to the dollar.
The depreciation in the value of the currency is mainly attributed to India’s growing trade deficit and increased capital outflows, which create new risks for the rupee, as does the currency’s fall to a record high adds to inflation woes.
Deterioration of balances
“India’s external balances are deteriorating,” Goldman Sachs Group Inc. economists wrote in a note on Thursday, citing terms-of-trade shock from rising commodity prices and weaker of global growth.
“Going forward, the Rupee’s path is likely to be pushed lower against the Dollar due to deteriorating external balances.”
While the Reserve Bank of India has started raising rates, which typically support currencies, these moves are also deflating the domestic stock market and may accelerate capital outflows that weaken the rupee. Meanwhile, the demand for dollars is increasing, putting further pressure on the currency and forcing the RBI to dip into its reserves to support it.
The central bank says risks are manageable so far and the external sector is “well protected to withstand ongoing terms-of-trade shocks and portfolio outflows.”
How the Trade Balance or a Deficit Affects the Exchange Rate of a Currency
The trade balance (that is, the difference in value between a country’s imports and exports, which reflects a higher or lower demand for a currency) can affect exchange rates.
A country with a high demand for its goods tends to export more than it imports, which increases the demand for its currency. A country that imports more than it exports will have less demand for its currency.
The following four indicators require further examination of India’s external finance challenges:
Widening of the deficit
India’s current account deficit – the broadest measure of trade – is likely to widen to 2.9% of gross domestic product in the fiscal year ending March 31, according to a Bloomberg survey in late June. nearly double the level observed the previous year. . A widening account deficit naturally implies the need for external financing.
“The widening of the current account deficit has been relentless,” said Rahul Bajoira, economist at Barclays Plc in India. “The general increase in commodity prices is likely to keep the deficit stable in the short term and, together with capital outflows, exacerbate external financing needs.”
If it starts approaching 4% of GDP, policymakers will need to take both fiscal and monetary action, he said.
India’s foreign exchange reserves, which can cover around 10 months of imports, fell by more than $50 billion from a peak in September to $587 billion in the week to June 17, as the RBI is looking to stabilize the currency and importers are looking for more dollars for expensive energy. imports.
The RBI is fighting on multiple fronts to slow the rupiah’s decline, while its stated stance is that it intervenes to curb currency volatility, not influence its direction. Nonetheless, the RBI spent $18 billion in the spot market to support the rupiah between January and April, according to the latest data from the central bank.
How do foreign exchange reserves affect exchange rates?
It can be understood that foreign exchange reserves act as a buffer against factors that can negatively affect the exchange rate of a currency.
Thus, a country’s central bank uses its foreign exchange reserves to help maintain a stable rate, buying or selling depending on the direction it wants the exchange prices to go.
More expensive imports
India’s trade deficit widened to a record $24 billion in May after the country’s import bill nearly doubled due to a surge in global crude oil prices. At the same time, exports slowed as the Russian-Ukrainian conflict and tighter monetary policies weighed on growth overall.
“A broader increase in the commodity bill will support annual imports – a mix of purchases of crude oil, coal, fertilizers and edible oils,” said Radhika Rao, senior economist at DBS Bank Ltd. , based in Singapore. She estimates a 20% increase in the total. imports, outpacing export growth. “That will likely leave the merchandise trade deficit about 40% wider this year.”
Foreign investors have withdrawn more than $32 billion from Indian stocks over the past year, making it Asia’s worst performer after Taiwan. There was also a bond outflow, putting India just behind Indonesia and Malaysia.
“With portfolio outflows set to continue amid weakening global equity performance and further deterioration in the balance of payments in the coming months, the risks of rupee underperformance cannot be ignored. said Madhavi Arora, chief economist at India-based Emkay Global Financial Services. ltd.