Rupee is fairly valued: Experts

Technical charts suggest currency might strengthen

There is no unanimity on what is the rupee’s fair value, neither among currency dealers nor among economists. Besides, various models and technical charts paint contradictory scenarios. On a trade-based measure, the rupee is overvalued and should depreciate. The real effective exchange rate (REER), which gauges the rupee’s strength vis-à-vis six major currencies and again 36 of India’s trading partners, shows the currency is hugely overvalued.

On a 36-currency trade basis, with base year 2004-05, the rupee is around 16 per cent overvalued. On a six-currency basis, comprising currencies of India’s major trading partners, the 2004-5 base shows the rupee is 27 per cent overvalued. But with a base of 2015-16, the rupee is only 3.5 per cent overvalued. Data from the Bank for International Settlement (BIS) also show the rupee is mildly overvalued if the base year is changed. The latest base year also corresponds to how the new series of gross domestic product (GDP) numbers are calculated. The present value, therefore, seems to be adequate, say economists.

However, technical charts show the currency should strengthen further, says a dealer with a foreign bank who requested anonymity as he is not authorised to speak to the media. The rupee had reached an all-time low of 68.85 a dollar on August 28, 2013. The local currency closed at 66.81 a dollar on Friday. Commensurate with inflation, the rupee has depreciated gradually over the years, but not in a panic mode.

The present value has come into effect through a price-discovery mechanism, where the price of the local currency is determined by the inflow of other currencies, mainly the dollar. One important measure to gauge here is how much of inflow in a country is portfolio driven and how much is coming for the long term, through the foreign direct investment (FDI) route.

India’s current account deficit (CAD) as a percentage of GDP was 4.82 per cent at the end of 2012. At the end of 2016, the CAD is estimated to be at only 0.6 per cent of GDP. This marked improvement in the deficit has also meant that the rupee has remained one of the most stable currencies in Asia. In fact, the deficit reduction is way better than what the International Monetary Fund had expected from the country.

The IMF had in 2013 said India’s norm CAD is 3.4 per cent of GDP. The norm CAD, also called structurally sustainable CAD, was revised down to 2.5 per cent of GDP in 2015. The norm indicates the permanent current account deficit of a country. But India’s CAD at 0.6 per cent is way above that bar. Norm CAD reflects an intrinsic value and not necessarily the actual value of CAD.