Weak Rupee may Hit UAE Exports to India but Boost Investment.

Dubai: A temporary flight of capital from the UAE to India can be expected as the Indian rupee touched a record low for the second day in a row on Tuesday, members of the UAE's Indian business community said.

"Due to the dollar-rupee rate, there will be better attraction for investors to invest in India because the yield is better. More investments could flow into India," said Paras Shahdadpuri, chairman of the Nikai group of companies and former president of the Indian Business Council.

Exports to India, the UAE's biggest trading partner, may become more expensive if the rupee sustains its current low levels or weakens further, said Shahdadpuri. "If this rate continues, there is a likelihood of a minor slowdown in exports from the UAE to India."

The depreciated rupee may further fuel inflation in India, impact GDP growth and bilateral trade, he added.

"Inflation will go amok and oil will become expensive, especially that India is a net oil importer," he said.

The implications of rising oil imports to India will be either passing the price on to the consumers, leading to a possible political unrest, or government oil subsidies that will increase the public deficit, he said.

Indian tourism to the UAE may also be slightly affected as it becomes more expensive for Indians to travel abroad, said Suresh Kumar, a senior banker.

Non-resident Indians with families living back home are likely to increase remittances to India and benefit from the low currency rates, said Sudhir Shetty, COO of global operations with UAE Exchange.

The Indian rupee fell due to declining industrial output and a growing current account deficit, Kumar said. "The interest rate has been pushed up and the currency is falling, so it's a double whammy. The Reserve Bank should look at this carefully. It's caused by a fiscal deficit in India and the deficit between exports and imports," he said.

‘Temporary blimp'

"They have to snap out of it by encouraging domestic production, reducing interest rates, strengthening the rupee and managing the payment of oil and gas imports sensibly," he said. Kumar expects the rupee to stabilise over the next three months with a sound management of the economy that separates politics from economics, he said.

"The key question is, is this a temporary blip or will it have to be managed? Will the authorities say they don't want to intervene in the market or will they support the rupee? It's a passive approach if they allow the market to experience this volatility. The key thing is to manage the current account deficit," he said.

For now, the rupee will hover at the level of 50, give or take two points, said Bharat Butaney, President of the Indian Business and Professional Council.

The depreciation of the rupee will be a short-term phenomenon that will recover within a week to ten days, he said.

"The Indian economy is still strong vis-à-vis other global emerging economies. What's happening is a panic reaction to the happenings on both sides of the Atlantic. America has still not recovered from its economic woes, housing is stable but the industrial sector is still weak. The Eurozone debt crisis is bad. That's where there's a little panic," he said.

"The shakeup in Europe is creating turmoil in the rupee, the lowest level in two years." The recovery of the rupee will depend on how quickly France and Germany manage to mobilise support for the euro, he added.

"It's a temporary phase, India is looking at close to eight per cent growth and its economy is in a good state and investors will come back to India. It's a natural choice for investors, no other country is doing so well."

Source : gulfnews.com