A 0.50 percentage point increase by India's central bank Tuesday in its benchmark interest rate to tame inflation means Indians residing in the UAE may soon have to prepare for a double whammy.
Not only will the banks in India now charge them higher interest rates on home, industrial and car loans, they also may have to come to terms with an appreciating rupee that would possibly knock off some value from their remittances back home, bankers told Gulf News.
Following the central bank move, the rupee further appreciated versus the dirham Tuesday, "Today's exchange rate is 11.90 rupees for Dh1," an executive at UAE Exchange, a local currency remitter told Gulf News.
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The rupee has appreciated more than 16 per cent versus the UAE dirham since March 9, 2009, the day the dollar touched a lifetime high versus the rupee. Since then, the dollar has been in decline, steadily falling against major global currencies. The dirham is pegged to the US dollar.
The Reserve Bank of India (RBI) increased the repo rate, the rate at which lends to the banks to 8 per cent from 7.5 per cent, topping forecasts that it would raise rates by 25 basis points. The move stunned investors.
"Loans are going to get costlier in India following today's central bank decision — banks may raise interest rates on loans by 25 - 75 basis points, depending on the size and the business of the banks," said K.R. Vijayakumar, Chief Representative (GCC Operations) with Federal Bank, Kerala.
"The interest rate hike will considerably slow-down the credit in India. The remittances to India may also suffer as the rupee will appreciate against the dirham," he added.
Ashok Gupta, chief executive (GCC Operations) at India's Bank of Baroda said while the interest rates on individual loans are set to rise, deposit rates at banks in India are set to go up further as well.
"However, the rate of interest on non-resident Indian deposits will go up further, so the savers are going to benefit," he added.
The RBI's rate rise was its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks, and sent bond yields and swap rates sharply higher and stocks lower. India's benchmark 10-year bond yield rose as much as 10 basis points to 8.42 per cent after the policy decision, while the benchmark share index was down to 1.76 per cent after starting the day in positive territory.
India is the UAE's largest trading partner.
According to the UAE Ministry of Foreign Trade, in 2010, imports from India were valued at $22.65 billion, while the UAE's exports to India were valued at $7.61 billion.
India's re-exports from the UAE were valued at $14.22 billion.
India's two-way non-oil trade with the UAE rose a whopping 53.45 per cent on year to $44.53 billion in India's fiscal year that ended March 2009, enabling the UAE to retain its status as India's largest trading partner, the Indian embassy in Abu Dhabi said.