MUMBAI: Rupee, which has plummeted in the past few days, is likely remain at 70-72 this year, say currency experts. Gone are the days when the humble currency was trading below 68 for one US dollar; it took a deep dive from 69 to 72 in just 15 trading sessions. Both the government and the RBI made few attempts to hold it down, at least until late last week, when the central bank sold $3 billion forex reserves.
“Reasons for the rupee free fall are plenty...trade deficit was high, exports weren’t picking up....It’ll be reasonable to say 70-72 is appropriate. If you see, rupee movement has been fairly stable in the past few years,” currency expert Jamal Mecklai told The Sunday Standard.
Historically, August has been a weak month for rupee. We have overcome major episodes in August 1997 (during Asian crisis) and in August 2013, when it fell over 25 per cent. Despite precedents, two questions remain relevant: Should we stabilise our exchange? If yes, at what rate?
Generally, in India, governments favour an overvalued rupee and any depreciation or devaluation is seen as a sign of weakness. An overvalued currency makes imports cheaper and possibly moderates inflation, but needless to say, exchange rate becomes out-of-alignment with economic fundamentals. That’s why RBI adopted ReeR (real effective exchange rate) to capture the relative effects of inflation on the rupee exchange rate of select countries with which we have significant trade.
Expressed as an index, a ReeR above 100 reflects overvaluation and below 100 reflects undervaluation. Currently, ReeR is supposedly overvalued and though it corrected from 122 in January to 114 now, another 3-4 per cent erosion isn’t ruled out, should panic set in emerging markets later. But not all agree with ReeR, with former RBI governor Bimal Jalan openly stating that ReeR wasn’t a reliable guide. Perhaps that’s why RBI is guided by ReeR in policies, but isn’t bound by it.
As a thumb rule, movements within 5 per cent of ReeR was welcome, between 5 and 10 per cent warrants close observation and intervention if volatility is higher, while deviation of over 10 per cent warrants intervention, unless there are good reasons not to do so. Year-to-date, rupee depreciated over 10 per cent, but RBI wasn’t moved — rupee fall had other currencies for company. But last Thursday saw Asian currencies appreciate, which is when the central bank buckled up to play its part.
Traders, who thought rupee was shamefully weak in early August, gradually took comfort with government reasoning that other currencies too are depreciating, reflecting a strengthening dollar, not a weakening rupee. Whether it stabilises or loses further ground from here depends on a string of internal and external factors: oil prices, monsoon, volatile capital flows, US Fed’s September policy, US mid-term elections, global trade scuffles. Back home, trade deficit, which already widened to $18.02 billion in July, and exports, which contribute 20 per cent to GDP, need their pulse checked.
Exports have under-performed despite strong global growth, and though theoretically exporters are deemed to gain when rupee depreciates, in reality, the benefits appear insignificant for two reasons. One, because traders price in potential exchange rate risks and small exporters unfamiliar with hedging and thus pocketing gains from spot prices, comprise a miniscule component to total exports. Two, vulnerabilities of CAD, which stood at 2.4 per cent of GDP as on June, persist.