Many Indian expats take advantage of the low rupee to send funds home.
Image Credit: Ahmed Kutty / Gulf News

Dubai: The Indian rupee continued to decline against the UAE dirham, with the rupee closing at 20.46 rupees on the interbank forex market on Friday.

The weakness of the rupee against the dirham reflects the decline of the currency against the US dollar to which the UAE currency is pegged.

The Indian currency posted its worst drop since April 9 on Friday due to higher oil prices and the strengthening of the dollar in international currency markets.

The rupee fell 20 paise to close at 74.99 against the US dollar on Friday, as higher crude oil prices weighed on investor sentiment, even as domestic stocks gained.

In the interbank forex market, the local currency opened at 75 and saw an intraday high of 74.91 and a low of 75.16 against the US dollar in day trading.

Local unit eventually settled at 74.99 per dollar, down 20 paise from its previous close.

Weak outlook

The rupee has been on a persistent decline over the past week largely due to the rise in crude oil prices.

India imports more than 80 percent of its domestic oil consumption, which accounts for about 20 percent of the total import bill, resulting in a large outflow of foreign exchange to meet import demand.

Brent crude futures were up 0.76% to $ 82.57 a barrel on Friday.

Typically, every $ 10 per barrel increase in crude prices results in an additional deficit of $ 12.5 billion, or about 43 basis points of India’s GDP, according to an RBI estimate in 2019.

The rupee is also expected to be weighed down by foreign currency outflows resulting from foreign institutional sales on equity markets. Although domestic stocks continued to post gains with BSE Sensex closing 381.23 points or 0.64 percent higher at 60,059.06, the gains were largely driven by domestic investors. Foreign institutional investors, on the other hand, were net sellers fearing a technical correction in the markets.

Monetary Policy

The Reserve Bank of India (RBI) on Friday kept its key rates unchanged for the eighth consecutive time, lowered the inflation target for 2021-2022 to 5.3% and indicated the outcome of the accommodative policy as the he economy is showing signs of emergence. of the impact of the Covid-19 pandemic. The RBI terminated the government securities acquisition program (G-SAP) as part of liquidity normalization.

On the macroeconomic front, the RBI decided on Friday to keep the benchmark interest rate unchanged at 4% but maintained an accommodative stance even as the economy shows signs of recovery after the second wave of COVID.

“Our whole approach is a step-by-step approach. We don’t want suddenness or surprises. More so, we realize that when we approach the shore, we don’t want to tip the boat. Because we realize there are lives and journeys beyond the shore, so we don’t want any surprises. Our approach will be calibrated, it will be a gradualism approach, ”said RBI Governor Shaktikanta Das, announcing the policy changes.

While liquidity normalization bodes well for the rupee in the long run, in the short term, a correction caused by the contraction of liquidity in the stock market and the subsequent withdrawal of foreign investors could hurt the rupee further.

Foreign portfolio investors have invested a net amount of Rs 670 billion in Indian stocks so far this year. A quick sale of carry trade positions could cause further problems for the rupee.

How far ?

Analysts expect the rupee to move closer to 75.50 and may even briefly reach 76 against the dollar, given current economic conditions and the outlook for oil prices.

The latest RBI data showed India’s foreign exchange reserves declined $ 1.169 billion to $ 637.477 billion in the week ended October 1.

Analysts said the substantial reserve position gives the RBI the leeway to intervene in the interbank foreign exchange market and keep the rupee’s sliding range limited in the near term.

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