rupee may be heading towards 70

8/21/2019 Rupee May Be Heading Towards 70

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Rupee may be heading towards 70. Are you ready for such a change

The Indian Rupee fell to a new low of 62.22 against the dollaryesterday, levels not seen since the beginning of the year. Is this part of a broader

depreciation trend of the Rupee? Lets examine some of the facts:

1. The Rupee is overvalued

A recent RBI Bulletin indicates that as per the real effective exchange rate (REER),

the currency is overvalued by 6%. The REER index is trade-weighted, based on six

currencies and indicates a higher inflation differential between India and its trading

partners. The index shows a value of 106 for October 2014 compared to a value of

98 for the same time last year.

Even if we take a rough estimate of USD/INR at 61, it pegs the theoretical fair value

of the currency at just under 65.

2. Other emerging market peers have depreciated

Despite announcements of tapering by the US Federal Reserve, the rupee has

largely remained stable over the last year. This is due to a combination of factors

such as a change in sentiment brought by the new government as well as timely

interventions by the RBI.

These changes have created a large influx of foreign institutional flows over the last

year that has enabled the rupee to perform far better than its peers. Other emergingmarkets have seen far more volatility in their currencies. As per RBI data, from

January 1 to September 30, 2014, the rupee has marginally appreciated by 0.5%

while other currencies have witnessed a depreciation. For example, the Russian

Rouble by 16.9%, South African Rand by 7.4%, the Turkish Lira by 5.8% and the

Brazilian Real by 3.4%.


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A situation where these foreign flows start to slow or pull out due to change in

sentiment will increase pressure on the currency. A lot of these factors, such as the

US Fed tapering and a strengthening dollar, are outside the control of India.

3. Exporters need a weaker Rupee to stay competitiveIt is very much in the interest of PM Modi’s “Make in India” campaign to see the

domestic currency weaken rather than strengthen.

Even though fundamentals of the economy are improving and inflation has been

falling, it is against the backdrop of slow growth and deflationary conditions in

developed markets, particularly in India's major trading partners. India is increasingly

competing for slowing demand in major economies of the world such as Europe,

Japan and China. Having a weaker currency would be an added advantage in

pushing exports.

4. Indians love gold too much

Our love of the yellow metal is well known. Gold imports have risen 280% to $4.17

billion in October from $1.09 billion in the year-ago period. This surge has prompted

the RBI and the government to relook at gold import curbs. These curbs can be

effective only up to a point and will also encourage smuggling of the yellow metal.

India’s trade deficit has been kept in check by falling oil imports, but this is unlikely to

last if gold imports continue to surge. A weaker bias to the traded deficit will put

pressure on the rupee to fall.

5. Structural depreciation bias of the Rupee over the long term

If we see the trend of the rupee against the dollar over the last 10 years, it has been

one of steady depreciation.


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Source:XE.com

Even if PM Modi is able to take the Indian economy to new heights, the changes that

are needed will take time to implement and are unlikely to lead to a significant

structural reversal in the currency trend for the next year or two.

In light of this, it seems more likely that the rupee will touch 65 by the end of this

year and possibly 70 before the end of next year. Are you sufficiently hedged against

such a change?

rupee may be heading towards 70

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