What is the fair value of the rupee against the dollar?

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 What is the fair value of the rupee against the dollar?
As the rupee sinks against the dollar and corporates hedge their risk, many would like to know: What is the fair value of the rupee against the dollar? While, it's not a simple question, here's what experts are saying.

Economists and analysts argue that the rupee is over valued. In his, Maverick View column Savak Sohrab Tarapore, states that the fair value of the rupee against the dollar should be 70. "While most observers are arguing how soon the rate will move to $1 = Rs 60, the correct question is how soon it will move to Rs 70, which indeed is the appropriate rate given the inflation rate differentials," Tarapore has written in his column.

While writing his column the rupee had not crossed 60, but, has crossed it since then.

Foreign Broking firm Nomura in a recent PTI report feels that the rupee is overvalued. "Many may think the recent under-performance of the rupee, which has depreciated by around 9 per cent against the dollar since May 22, has brought the rupee closer to fair value, but our forex valuation analysis shows the rupee is still about 17.6 per cent overvalued," Nomura India said in a report.

A 17.6% depreciation would bring the currency closer to 70 against dollar.

Writing in the Mint V. Anantha Nageswaran notes," If one examines The Economist Big Mac Index or IMF and World Bank estimates of India's gross domestic product adjusted for PPP, the exchange rate should be around 20-22. In fact, according to the Big Mac Index, the rupee is the world's most undervalued currency against the dollar," his column states.

If the rupee is indeed the most undervalued currency against the dollar, then it sure has some way to go...and if it starts depreciating even further, expect inflation to rise, hence interest rates to rise and economic growth rates to plummet.


Read more about: dollar, nomura
Story first published: Monday, August 5, 2013, 8:21 [IST]
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