Mumbai: Is the rupee really overvalued? The Reserve Bank of India's (RBI) Real Effective Exchange Rate (REER) says so.However, timid growth in the developed countries and a strong rise in emerging market currencies have exaggerated the overvaluation, economists said.
Based on the 36-currency REER on a trade weights basis, the Indian currency is overvalued 16.39% in February 2017, higher than the 9.90% overvaluation a year ago. The six currency trade based weights shows that the rupee was overvalued 3.91% in February 2017 compared to a 2.73% undervaluation a year ago, on a 2015-16 base year.
However, economists say that the REER does not reflect the value of the rupee mainly as the value of its emerging market competitors have also increased in the last few months.
“REER has lost relevance because developed countries are not growing as a result of which inflation there has come down. The fact that the dollar has risen sub stantially against other major currencies, like the euro, has to be also taken into account. Our internal metrics show that the rupee's fair value is somewhere between 55 and 60 per dollar,“ said Indranil Sen Gupta, India econ Gupta, India economist at Bank of America-Merrill Lynch. In the last three months the Indian currency has gained 5.61% to make it one of the top performing emerging market currencies.However, its merging market peers have also gained in that period, with the Mexican peso rising a whopping 6.46% and the Russian rubble 4.96%.
In an interview late last month Barry Eichengreen, professor of economics and political science at the University of Califor nia, Berkeley said the rupee has not gained abnormally . “I was looking at some data. If you look at the rupee against a basket of currencies, it doesn't look that over strong that it will stymie trade,“ he said.
Economists say the RBI's REER does not show the true picture.“The extent of overvaluation may be less than what the RBI index suggests. Based on the new index we are working on, we think that the rupee is actually fairly valued on a trade weighted basis,“ said Shubhada Rao, chief economist, Yes BankBSE 1.13 %.
Source: economictimes.indiatimes.com