Currency exchange analysts seem to be finally expressing comfort at the rupee’s value.
After gaining eight per cent from all-time lows, it has been at 52-53 levels against the dollar since the start of this month. With both the finance ministry and the Reserve Bank of India (RBI) assuring exchange rate stability, market participants feel the current level is neither too high for exporters nor too low for importers.
“The rationale for holding the rupee's line around 52 is clear, in our view,” economists at Deutsche Bank said in a report. According to them, a sharp appreciation of the rupee removes an important competitiveness buffer that opened up in the past year for Indian exporters. “Given the need to boost growth, India is in need to protect this buffer,” they added.
The rupee appreciated 4.8 per cent in September, the highest gain as compared to other Asian currencies. Dollar strengthening and weaker domestic equity markets in the past week brought it back to 52-53 against the greenback. Despite depreciation, the rupee is still overvalued in terms of the Real Effective Exchange Rate, on six-currency trade-based weights.
“As of now, 52 appears a reasonable level, though the outlook can be better if reforms continue,” said the treasury head of a large public sector bank based here. The official added too much appreciation might lead to a knee-jerk reaction in case of unfavorable developments in the global economy.
The sharp appreciation last month could be partly attributed to monetary easing actions of central banks in America and Europe. “But the glow of these measures is fading, real economic difficulties in Europe continue to persist and uncertainty about China is casting an additional layer of gloom,” said economists at Deutsche Bank.
Also, India needs to continue to attract foreign fund inflows to match the daily dollar demand. “It is difficult to attract sustainable offshore inflows without exchange rate stability. If the risk on exchange rate is seen to be higher than the interest rate differential or expected return on the underlying asset, no prudent foreign investor will look at India,” said Moses Harding, head of market & economic research, IndusInd Bank.
More than appreciation or depreciation, it is the volatility in the rupee exchange rate that concerns both markets and regulators. “The rupee needs to stabilise,” said Hitendra Dave, managing director and head of global markets, India, at Hongkong and Shanghai Banking Corporation. It would, he said, help people make long-term investment decisions.
Rupee stability will also help RBI re build the foreign exchange reserves spent to put brakes on the rate downslide. The central bank sold $21 billion in the spot foreign exchange market between September 2011 and July 2012.
