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Rupee's current valuation above its fair value: Experts

August 22, 2013 09:41 IST

Rupee's current valuation above its fair value: Experts

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Neelasri Barman in Mumbai

The current valuation of the rupee, which has breached the 64-level against the dollar, is much above the fair value seen by experts. 

The Street’s concerns are focused on an early tapering of the third round of quantitative easing by the US Fed.

The rupee touched an all-time low of Rs 64.63 against the dollar in intra-day trades on Wednesday and ended at a new all-time closing low of Rs 64.04.

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Image: A salesman displays gold plates in the form of the Indian rupee note at a jewellery showroom.
Photographs: Pawan Kumar/Reuters

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The previous all-time low hit on Tuesday was at Rs 64.12, while the all-time closing low in intra-day was Rs 63.23. 

These levels of the rupee against the dollar are abnormally high, according to currency experts.

“In the current dynamic scenario, the rupee should trade at Rs 60-61 level. The reason is that exports have picked up, imports are coming down, the trade deficit is falling, and current account deficit (CAD) had been brought down from the historic high,” said N S Venkatesh, chief general manager and head of treasury, IDBI Bank and chairman of Fixed Income Money Market and Derivatives Association of India. 

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Image: A Kashmiri shopkeeper sits near garlands made of currency notes at a market in Srinagar.
Photographs: Reuters

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Similarly, J Moses Harding, executive director and chief business officer at Lakshmi Vilas Bank, believes the fair value for rupee is seen to be around Rs 60.

“This level is appropriate to reduce CAD and keep the exchange rate attractive for inflows,” he said.

Although the Reserve Bank of India (RBI) took several measures in the recent past to arrest the volatility in the currency, these did not work. Of late, month-end dollar demand from importers has also been a key factor affecting the rupee.

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Image: RBI Headquarters.
Photographs: Reuters

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The volatility in the rupee is near November 1997 levels.

Many currency dealers see the rupee hitting the 65-level against the dollar mark soon in the absence of major reforms directed towards strengthening of the rupee.

RBI has also been intervening in the forex market through state-run banks to arrest the rupee’s fall. However, as forex reserves have been depleting, it leaves less scope for them. 

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Image: A Kashmiri money changer Nissar Ahmad displays Indian rupee notes in Srinagar.
Photographs: Fayaz Kabli/Reuters
Tags: RBI

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According to Venkatesh, the inflation will come down if the rupee stabilises, thus leaving space for the central bank to cut interest rates for accommodating growth. Such a scenario will help attract capital flows in the country. 

Even economists agree that the rupee is far above its fair value. 

“The fair value of the rupee should be about 58-60,” said Rao, chief economist, YES Bank. On June 26, when the rupee weakened by around nine per cent against the dollar since May 22, NOMURA's FX valuation analysis showed the currency was still 17.6 per cent overvalued.


Image: An employee carries bundles of rupee notes inside a bank in Agartala.
Photographs: Jayanta Dey/Reuters

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