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The disruption caused by covid-19 has left a deep scar on India’s remittances inflow. India’s secondary income receipts, which mainly represents remittances, fell by around 8% year-on-year (y-o-y) in Q2FY21, according to official data.

At the end of the September quarter, remittances to India stood at $1.8 billion. For the first half of FY21, the decline was to the tune of 6.7% y-o-y.

This fall is not surprising considering that the World Bank predicted remittances to see a historic decline of 20% in 2020 to $445 billion. Uncertainties related to global employment opportunities and the resurgence of the virus could hinder the revival of remittances.

Tanvee Gupta Jain, chief India economist at UBS Securities India Pvt. Ltd, said she expects improvement in remittances to India in FY22. However, she cautioned of some near-term downside risks. “The biggest uncertainty is the evolution of the pandemic, the implementation and effectiveness of vaccines and the impact on global growth. There is also a risk of disruption to labour markets being deeper than earlier envisaged, thus affecting employment and/or incomes of migrant workers and hence remittance flows to India," she said.

However, despite some favourable factors such as rising crude oil prices and a depreciating rupee, economists foresee only a gradual recovery in India’s remittances in fiscal year 2022.

The correlation between changes in remittances and oil prices over 1983-2020 stands at more than 76%, according to an analysis by JM Financial Institutional Securities Ltd. For India, a lion’s share of around 55% comes from the Middle East, followed by the US, and Canada. The ongoing recovery in crude oil prices bodes well for the economic outlook of the middle eastern countries. From its 2020 low of $19.33 per barrel, Brent crude oil prices have significantly improved to $56 per barrel.

Further, the correlation between remittances and exchange rate (a depreciating rupee) is as high as 87%, showed JM Financial research.

The Indian rupee depreciated by more than 2% against the US dollar in 2020.

“This tends to have a positive impact on inward remittances as overseas workers are likely to remit more, taking advantage of the weaker rupee. Some companies on the other hand, could slow the pace of remittance inflows as they may delay the conversion because of foreign exchange risk (if they expect the rupee to depreciate further)," said Sok Yin Yong, fixed income analyst Asia, Julius Baer.

In 2019, India led in the receipt of remittances, receiving around $83 billion, showed the World Bank data. Remittances have been a key source of income for many Southeast Asian nations. For net-importers such as India, higher remittances aid in partially offsetting the deteriorating trade goods deficit and stabilizing the current account deficit.

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