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Remittances from UAE to rise as Indian rupee weakens

A stronger dollar, rising US treasury yields and a weaker Chinese yuan contributed to the rupee’s descent Unsplash.com
A stronger dollar, rising US treasury yields and a weaker Chinese yuan contributed to the rupee’s descent

Remittances from the UAE are likely to surge as the Indian rupee remains under pressure in the near term due to rising US treasury yields and a weaker Chinese yuan.

The rupee has declined over 1.2 percent from its late-July high to a five-month low at 83 per dollar for the first time in nearly ten months. 

A stronger dollar, rising US treasury yields and a weaker Chinese yuan contributed to the rupee’s descent, said Century Financial chief investment officer Vijay Valecha. 

“Historically, a slump in the rupee relative to the USD and AED is inadvertently followed by a surge in remittances to India by the NRI (non-resident Indians) community,” he said, adding that the weaker rupee allows NRIs to send more money to India while spending the same amount in their host nations.

The Indian external ministry said in July that 8.88 million of the 13.4 million NRIs live in the GCC countries.

The UAE is home to 3.41 million NRIs, followed by Saudi Arabia (2.59 million), Kuwait (1.02 million), Qatar (740,000), Oman (770,000) and Bahrain (320,000).

Since last autumn, the rupee appears to have found equilibrium at 82 per dollar, driven mainly by the rise in the Reserve Bank of India reserves from $525 billion in October 2022 to $601.5 billion as of August 4, 2023, surpassing the $600 billion-mark for the first time in 16 months. 

By bidding for the US dollar, the RBI has somewhat offset the impact of increased foreign flows into India and the broader weakness in the US dollar index, Valecha said.

The move ensured the rupee remained in a tight trading range since its record low in October 2022.

As a result, the rupee has underperformed any rally in Asian currency peers while still losing less ground during times of dollar outperformance.

Remittances account for around three percent of Indian GDP and are the second largest source of external financing after service exports. They serve as a financial cushion in the event India’s trade deficit widens. 

According to the World Bank, remittances crossed $100 billion in 2022, marking 12 percent year-on-year growth. 

The US recently overtook the UAE as the top destination for remittances, Valecha said.

“The rupee is likely to depreciate amid strong dollar and risk aversion in the global markets. The dollar is gaining strength as fresh economic data from the US signaled resilience in the economy,” Mint, an Indian financial news outlet, reported, citing brokerage firm ICICI Direct.

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