Despite the steep fall on August 6, the Indian rupee may still have more room to depreciate, according to the real effective exchange rate (REER) data released by the Reserve Bank of India (RBI).
But the central bank may not have appetite for such depreciation, say experts.
The rupee fell to its lowest level of Rs 83.96 against the dollar on August 6.
REER, which depicts a currency's strength relative to other currencies adjusted for consumer prices, showed that the Indian unit was trading 6.5 percent higher in June compared to a basket of 40 other currencies.
Economists contend that even the central bank has been trying to limit this overvaluation.
“In July, the RBI was a net buyer of dollars despite depreciation pressures on the rupee. This indicates that the RBI intervention focus is to limit rupee overvaluation against other trading partners. INR on REER metric is overvalued by 6.5 percent as of June 2024,” said Gaura Sengupta, chief economist, IDFC First Bank.
Sengupta noted that the recent weakness in the INR in August will further reduce the overvaluation on the REER metric.
Between July and August, the rupee depreciated 0.6 percent against the dollar.
Against other currencies
A Moneycontrol analysis shows that despite the rupee’s depreciation, it still underperforms most other competing economies.
The currency has depreciated 0.87 percent since January 2024 and 1.5 percent over the last 12 months, but the Vietnamese Dong was down 3.6 percent and 5.9 percent during similar periods.
Indonesian rupiah has depreciated 4.5 percent year to date and 6.5 percent since August 2023.
However, economists note that even if the rupee is overvalued the RBI may not orchestrate a steep depreciation.
“Rupee overvaluation on the REER is despite the NEER (nominal effective exchange rate) falling due to the RBI intervention. The inflation differential bit is not in the RBI's control, especially given low inflation in key trading partners like China. The weakening required in NEER for REER to fall below 100 will be quite substantial and may not be on the RBI's mind as such,” said Dhiraj Nim, FX strategist, ANZ.
Higher and lower
An analysis by Moneycontrol shows that over the last decade the rupee has spent more time overvalued as per REER rather than undervalued against currency baskets.
In the 121 months between June 2014 and June 2024, the rupee was overvalued nearly 80 percent of the time.
The current undervaluation in terms of NEER is also in line with historical trends.
The trend is different from the previous decade when the currency was undervalued 90 percent of the time in REER terms.
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