Rupee: whats the real value

Written by Raj Kumar Ray | Updated: Aug 29 2013, 06:55am hrs
The rapid fall in the value of the rupee against the dollar in recent weeks have raised a big questionwhether the Indian currency was overvalued and hence witnessing a correction along with other currencies of EMEs While policymakers are desperately trying to arrest the rupee fall with a raft of measures, analysts say the rupee will remain under pressure until growth picks up and CAD narrows. The rupee fall can be gauged from another anglethe real and nominal effective exchange rates or REER and NEER. RBI data shows the rupee fall is justified given the 36-currency REER has been falling in the last two yearsREER fell from 103.9 in FY11 to 101.4 in FY12 and 94.6 in FY13. During the current fiscal, REER fell from 95.2 in April to 89.3 in June.

The fact that sentiments are moving the rupee more than anything else is reflected from the wider fluctuation in NEER as compared to REER since FY12. REER reflects the inflation differential between India and the trading partners, while NEER mirrors BoP situation and sentiments. While CAD has widened to 4.8% of GDP in FY13 from 4.2% in FY12, the GDP growth has slid from 9.3% in FY11 to 6.2% in FY12 and 5% in FY13. Although finance minister P Chidambaram has drawn a red line for CAD at $70 billion or 3.7% of GDP for FY14, analysts doubt the number given the rupee fall, sluggish exports and rising import bill. Most brokerages have downgraded Indias GDP forecast with some expecting it even lower than 5% during FY14. Unless macro fundamentals improve, growth picks up and CAD is restrained, the currency is likely to remain volatile. S&P expects no quick fix ahead of the polls as the political calendar tends to delay the reform process. But India is still not on the brink of a BoP crisis like it was in 1991, when it had to resort to IMF funding, S&P added.