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Indian Rupee: Overvalued but getting stronger

February 9th, 2007 | Tag(s): | Popularity: 22% [?] |

The rupee:dollar exchange rate has been in a strong trend, going from 47 in July 2006 to 44 as of late. A recent Bloomberg video (I can’t find the link!) suggested that the rupee was overvalued by 8-9%, putting a fair value at ~47. However, an article in today’s Economic Times says that the RBI has intentionally allowed the rupee to get stronger, to help the government bring down the inflation rate. A stronger rupee reduces import prices for commodities which have been a major contributor to the recent jump in the inflation rate.

Looks like we will see USD:INR at 42/43 before we see 46/47.

PS: Sahad talks about the ET article at his VC Circle blog.

6 comments:

  1. rajat [April 5th, 2007]:

    can anyone explain whether strengthening of rupee will be helpful to the unduan economy in the long run or it will have drastic impacts

  2. Kaushik [April 6th, 2007]:

    Rajat: Generally speaking, a stronger rupee makes imports cheaper & exports more expensive - thereby helping some sectors (eg. energy, cap goods) while hurting others (eg. IT). A strengthening rupee may also draw in more FII/FDI flows, by offering a double-benefit to foreign investors in terms of asset appreciation + currency appreciation. Perhaps the best way forward is to let the rupee float freely and let the market determine a “fair” value - but that remains a remote possibility.

  3. Nikhil [April 8th, 2007]:

    Most Asian countries keep their currency values low in order to give employment by export. This is also facilitated by MNCs. Strengthening rupees is a short term phenomenon which will soon be aborted when political green is given.

  4. Shravan [April 9th, 2007]:

    A small clarification: Strengthening rupee is negative for FIIs. They get less rupees for $1 spent.

  5. Kaushik [April 9th, 2007]:

    Shravan,
    That may be true. But once they have invested and if the rupee continues to strengthen, then benefit even more while repatriating their profits back to US dollars.

  6. Ankit jain [July 10th, 2007]:

    well appreciating rupee has made india 1 trillion economy.so in that regard it has been good for us

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