Rupee may not be overvalued

RBI’s gauge of rupee’s relative strength in terms of the real effective exchange rate, or REER, puts the overvaluation at 12%, as of January


The Indian rupee’s recent sharp rise may not mean that the currency’s overvaluation has increased. Photo: AFP
The Indian rupee’s recent sharp rise may not mean that the currency’s overvaluation has increased. Photo: AFP

The Indian rupee’s recent sharp rise may not mean that the currency’s overvaluation has increased. In fact, some analysts do not think the rupee is overvalued.

The Reserve Bank of India’s (RBI’s) gauge of the rupee’s relative strength in terms of the real effective exchange rate (REER) puts the overvaluation at 12%, as of January.

However, seen along with REERs of other emerging market currencies, the overvaluation is not stark as shown by chart 1, according to Edelweiss Securities.


Also, chart 2 shows the sharp movement in the nominal exchange rate, too, does not appear as an outlier.

“Though India’s macro remains stable, its suppressed inflation and differentials could widen causing INR (Indian rupee) to depreciate from current levels. We believe that INR may not be overvalued but it appears to be over-heated,” said the firm in a note.

The company expects the rupee to depreciate to 68-69 by December.

Capex gets priority in states budgets

In a sign of changing times, states are allocating more money for capital expenditure (capex).

The aggregate capital expenditure of 13 states is estimated to rise 18% in fiscal 2017-18, almost two times the projected growth in revenue expenditure (10%), an analysis of the respective (13) states’ budgets by JM Financial Institutional Securities Ltd shows.

Of the 13, Rajasthan is the only state that is expected to see a drop in capex. In terms of sectors, capex is focused towards social services, compared with economic services.

“Major beneficiaries are education, water supply, housing, sanitation and urban development,” JM Financial adds. “Capex on economic services like transport and rural sector (irrigation, rural development, agri and allied activities) have also seen growth in mid-teens.”

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