The decline of the overvalued rupee
The chart shows that the rupee is overvalued and the recent fall may in fact be welcomed
The rupee has weakened to levels seen in mid-2013, when the currency was under a lot of pressure. While India is less vulnerable on the external front now, there are a host of factors responsible for the local currency’s depreciation. Oil prices are inching higher, foreign investors are pulling out money from equity and bond markets owing to varied factors, such as a tax row with the government and poor corporate earnings. Moreover, the upcoming increase in the US Fed policy rate has caused funds to flow away from emerging markets.
Uncertainty on its timing has led to volatility. Secondly, as the chart shows, the real effective exchange rate, or REER, which is the weighted average of a country’s currency relative to a basket of currencies of its trading partners adjusted for inflation, has been climbing up even as the rupee has been falling relative to the US dollar in the past one year. That shows the rupee is overvalued and the fall may in fact be welcomed. Whether it will prop up the country’s sagging exports is another question altogether.
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