n March ‘09 the American dollar index touched 52.1850, its highest point this year. Since then, however, it has been a steady downward drift for the greenback. Come December 09, the dollar index had slipped to 46.5547 (15 day average), its lowest point in more than a year.
Source – www.x-rates.com
Earlier the economic risk of the Indian rupee was typically one-way: downwards. Undoubtedly, the Rupee was expected to weaken against the Dollar. Thus, most NRIs preferred leaving their money in foreign currency or FCNR deposits – the low yield on these deposits would be more than made up by a continually falling Rupee, thereby making the Rupee wealth of NRIs grow with time.
Now, however, the situation has changed. The Indian economy is sitting on large foreign exchange reserves (> $250 billion). Given that India is now more globally linked than at any other time in its recent history, the impact on the value of its currency is that it is buffeted by international trends.
Whatever might be expected to happen in the short term (1-3 months timeframe) with USD/INR movement, over the next 1 year it seems that the Rupee is headed for a moderate strengthening against the Dollar from its current levels? This would be based on current fundamentals of asset market as well as pure demand and supply driven.
On the fundamentals side, India is expecting a rate hike by March 2010, which now appears a near certainty and given the Fed’s stance on continuance of easy policy in 2010, rate differentials in Asia pacific and the west should widen and put further pressure on the US dollar. This coupled with sustained growth signal from the RBI and its comfort of clocking GDP growth upwards of 6% in fiscal 2010 and possibly higher growth in fiscal 2011 puts the demand supply situation of the USD/INR market in favour of the latter.
The last point which makes the case for a weaker dollar from an Indian context is also the fact the should there be a correction in the equities market, valuations would look compelling in medium term thereby making way for more dollars coming into lending strength.
How does it affect you?
NRIs investing back in the US will have major set backs. For example, last year you could Rs. 4.5 lakhs worth of property in just $10,000 now it requires $11,500, an increase in the dollar spend. Similarly if an NRI is sending money back home an average $1000 yielded Rs. 43,000 but now only yield Rs. 39,000. On average there is an 8% decrease in the yield.
Interest rates in India are close to 8% for fixed deposits (9% for senior citizens). Interest rates in the US are also around 5% and further going down. The debt portion of the NRI investment portfolio (earning 4%-5% in the US) if held in dollars will not keep pace with the increasing inflation in India (which is a lot higher).
Steady erosion in the US Dollar will severely impact the NRIs. Most of them hold dollar assets – (their future earnings held mostly in dollars) which on purchasing power parity basis will also diminish. While they enjoyed the ride when the rupee slipped to Rs 52, they will have to unwillingly give away a fair proportion of these notional gains. In rupee terms, they would steadily lose a certain portion of their net accumulated wealth each year.
The depreciating dollar will also increase the cost of living in the US as most of the items of general consumption are imported from developing countries (India, China, South East Asian nations etc). The comforting factor is that for Non Resident Indians who have no plans of returning to India- the dollar rupee equation may not hold much relevance.
However, if NRIs intend to return to India/ have returned and hold assets abroad should re-look at their financial goals and evaluate what their country wise allocation should be; i.e. If 70% of their goals are in India, they should systematically start moving funds to India accordingly.
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