UAE To Be Insulated From Rupee Slide Effects

With the Indian rupee in free fall, remittances from the UAE’s large Indian community have soared.

Banks and currency exchanges are cashing in on the remittance craze as the rupee’s slide continues unabated.

According to a World Bank report released earlier this year, global remittance flows increased 10.77 per cent in 2012 to $514 billion, up from $464 billion in 2011.

India received the highest amount of remittances totalling $69 billion, followed by China, which received $60 billion.

“It is generally believed that Indians working abroad save 70 per cent of their disposable income,” said M.R. Raghu, senior vice president-research at Kuwait Finance Centre.

Raghu said that the remittance outflow from the GCC has been historically high due to its reliance on an expat workforce.

He added that nearly half of GCC remittance outflows ($61 billion) poured into India in 2012, with remittance outflows from the UAE outpacing the GCC average.

Gaurav Kashyap, head of futures at Alpari, a global online currency and commodity broker, said that the UAE will undoubtedly see an increased capital flight if the rupee continues to weaken.

“Loan activity from UAE banks has increased as Indians take on more liability locally to remit back home and capitalise on the weak rupee,” he said.

However, the surge in the outflow of remittances will not affect the UAE economy drastically, experts said.

“The UAE, which enjoys a current account surplus, would be marginally affected by surging remittances,” said Raghu.

But the country will definitely feel a pinch due to measures adopted by the Indian government to stem the rupee’s crash, experts say.

One of the capital control measures adopted by the Reserve Bank of India is the reduction of the cap on outward flow of remittances from $200,000 to $75,000 per year, which could slow down investments in Dubai’s real estate sector.

According to Dubai’s Land Department data, Indians contributed to the biggest portion of foreign investments in Dubai’s real estate market with transactions worth Dhs8 billion during the first half of 2013 alone.

“We could see this trickling into lower real estate transactions from Indians in Dubai,” said Kashyap.

“For wealthier Indians, the real estate market in Dubai has provided an attractive alternative to their underperforming equity and real estate markets back home. Such capital controls will limit this activity and would make real estate in the UAE much less accessible to this particular demographic of investors,” he said.

Kashyap continued to say that most of the Indian remitters would not be able to exhaust the new cap, which would insulate the GCC from the effects of a rupee free fall.

Raghu said the government’s efforts to stem the currency slide, which included a duty on all flat-panel televisions (LCD, LED and plasma) could be a blow to the UAE’s retailers.

“Customs duty on gold was raised three times and they currently stand at 10 per cent. Such measures may be imposed on high-end mobiles and laptops, if the rupee continues to slide,” said Raghu.

But the retailers also stand to benefit from a weak rupee since they can now buy Indian products at a much cheaper rate with cost of imports falling, said Raghu.