The Reserve Bank of India (RBI) said the value of the rupee is 12% higher than its actual purchasing power, or the inflation-adjusted value of the currency, even as the currency touched a fresh nine-year high on Monday.
Technically, this is called the real effective exchange rate (Reer). The Reer is arrived at after comparing the rupee with a basket of other currencies that are India’s largest trading partners. The Reer of the Indian rupee compares the currency value with that of the Japanese yen, the euro, the pound sterling, the Hong Kong dollar and the Chinese yuan.
The rupee ended at Rs41.67/68 per dollar on Monday, off an early peak of Rs41.575, its highest since May 1998.
In its Macroeconomic and Monetary Development, a document released on the eve of the annual credit policy of the central bank, RBI said the rupee is 12.21% overvalued as on 18 April. Between April 2006 and April 2007, the Reer has appreciated by 7.8%. The Indian rupee has moved in the range of Rs43.14-Rs46.97 to a dollar over the past year. The currency depreciated to Rs46.97 on 19 July 2006, reflecting higher crude oil prices and outflows by foreign institutional investors, but it recovered the ground and appreciated to Rs43.60 to a dollar in the second half of March 2007, as foreign investors aggressively invested in Indian markets.
At its high, the rupee was up 6.4% this year—the best performing Asian currency against the dollar.
In a bid to thwart the rupee’s rise, RBI bought $19.7 billion worth of rupees in the four months to end of February, and the market suspects it intervened in March as well. The central bank’s persistent intervention has fuelled inflation and money supply, which are both running above its target levels.
Reuters also contributed to this story.