First World will attract more flows

Emerging market investors should recalibrate strategy to this reality

One of the simplest ways to ‘value’ foreign exchange rates is by using the following calculation. First, compare risk-free interest rates of the same tenure in any two currencies. For example, the one-year treasury yield in rupees is 6.36 per cent and the one-year T-Bill yield in the US is 1.7 per cent.  

The Reserve Bank of India (RBI) reference rate on Thursday was Rs 64.28 per dollar. If you convert rupee to dollar at 64.28, invest in US Treasuries and convert back, you receive Rs 65.37 if the exchange rate stays static. The same investment of Rs 64.28 held