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Japanese brokerage Nomura has painted a rosy picture for the rupee in the medium-term gaining from the current levels to around 63.20 by late 2016, despite the dollar is seen continuing its upward rally against all major currencies.
Against the consensus view of the rupee gradually depreciating until end-2016, the brokerage feels that the domestic unit will appreciate to 63.20 against the dollar by the end of Q3 of 2016, Nomura said in a note issued here today.
Earlier, it was wrongly reported that Nomura was of the view that the rupee would remain under strain till the end of 2016.
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The rupee closed steady against the greenback at 63.91 today, on fag-end dollar demand from importers coupled with emergence of weak sentiment on the global front, thus surrendering the early trade gains of 10 paise.
Explaining its view, the brokerage said, the consensus view is driven by expectations of the dollar strengthening and the belief that the Reserve Bank will continue to aggressively buy dollars from the market.
These expectations, Nomura said, when combined with a world of beggar-thy-neighbour policies, concerns over the dollar's overvaluation and its impact on India's export competitiveness, have resulted in a broad view that the RBI has a preference for a weaker rupee, which can help prop up falling exports.
Countering these views, Nomura said odds favour a stronger trade-weighted rupee (in real effective exchange rate terms or REEF) as the rupee is not significantly overvalued (only marginal overvaluation of 0.5 per cent).
The current rupee valuation is based on purchasing power parity and real effective exchange rate (REER) models, which indicate some overvaluation, but the fundamental equilibrium exchange rate (FEER) model shows it is undervalued, it said.
"Indeed, according to our analysis, the appreciation of the rupee over the past year looks justified by the country's productivity growth," the report said.
Secondly, it said although REER appreciation has been blamed for the recent contraction in exports (-16 per cent in H1 of 2015), the acutal reasons are weak global demand, lower export prices, weak farm production and bottlenecks in the minerals sector.
