The rupee is overvalued by 8 per cent on a trade-weighted five-country real effective exchange rate (REER) basis, despite depreciating by 3.53 per cent since the beginning of September 2005. |
The Indian currency has, in fact, appreciated against the yen as well as the euro. Its fall in nominal terms against the dollar is on account of the US currency's appreciation against other major currencies. |
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The rupee appreciated by 1.63 per cent against the euro to Rs 53.49 a euro from Rs 54.38 on September 1, 2005. Against the yen, the rupee has risen by 2.81 per cent to Rs 38.69 per 100 yen from Rs 39.81. The Indian currency is flat against the pound sterling at Rs 79.54. |
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Finance Minister P Chidambaram today said the rupee was not weak, referring to the currency's REER level. "In real effective exchange rate, it (rupee) is 108 (8 per cent overvalued)," Chidambaram said while speaking to reporters on the sidelines of a banking seminar here. |
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The Reserve Bank of India (RBI) has revised the REER basket and opted for a six-country trade basket to compute the REER from December. The new index, currency analysts say, will still show significant over-valuation of the rupee. |
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"The rupee has lost only against the dollar but appreciated against other currencies. This is because the dollar has gained against all major currencies following two (25 basis points each) hikes by the US Federal Reserve on September 20 and November 1," a foreign exchange dealer said. This essentially means those corporations that have their receivables in dollars are set to gain. |
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Similarly, importers from the "euroland" will also gain. "It all depends on in which currency your invoices are," said another dealer. |
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The key to the level of the rupee, according to the dealer, is the growing strength of the dollar against other currencies. If the dollar continues to gain against other major currencies, the rupee is bound to weaken against the US currency even though it may be gaining against other units. This also means that on a REER basis, it will continue to be overvalued. |
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The immediate pressure on the rupee is the rapidly growing current account. |
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At $6.2 billion in the first quarter of 2005-06, the deficit is only marginally lower than the $6.43-billion in all of last year. The current account deficit by year-end can reach $23-25 billion or about 3 per cent of the GDP. 'If the current account deficit widens, the rupee will be under further pressure,' said a banker. |
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The RBI has replaced the currencies of France and Germany by the euro and added the Chinese yuan and the Hong Kong dollar to the basket. Thus, the final list of countries in the new six-country REER are the US, the UK, Japan, Euroland, China and Hong Kong. |
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The inclusion of Hong Kong is meant to capture Indian trade with China. The new index has addressed one key shortcoming of the five-country REER. It has not included any Asian currency, says a recent JP Morgan Chase report. |
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According to the report, there is a sharp decline in India's merchandise trade with the EU, the US and Japan. The biggest loser of the three is the EU whose share in India's total goods trade declined 3.5 percentage points between 2001 and 2005. |
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For the first time in 2005, the share of India's total trade with emerging Asian countries exceeded the share with the EU. India's merchandise trade with China surged 62 per cent last year after jumping 47 per cent the year before. |
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