Fall brings rupee closer to "fair value"

Fall brings rupee closer to "fair value"
REUTERS

MUMBAI, MAY 11: The Indian rupee is now trading close to its "fair value" and the central bank is likely to keep it at current levels after Wednesday's steep fall, Deutsche Bank's regional economist Sanjeev Sanyal said on Thursday.

The rupee fell 0.85 percent to a record low of 44.08 to the dollar on Wednesday, largely because of heavy and continuous demand for dollars from the country's largest commercial bank, the State Bank of India. Traders see the state-run bank as a surrogate for the central bank.

In afternoon trade on Thursday, the rupee erased some of these losses and was quoted at 43.91/93 per dollar.

FALL JUST AN ADJUSTMENT: The lack of central bank support for the rupee led traders to believe it may have actually engineered the fall, deliberately adjusting the currency closer to its "real" value given the falls in other Asian currencies. The RBI has a strong grip on the foreign exchange markets,since the rupee is not convertible on the capital account and there are strong curbs on speculation.

Sanyal said the central bank's reluctance to stem the rupee's slide on Wednesday was consistent with its policy of targeting the real effective exchange rate.

"This is really a part of RBI's policy of keeping the rupee at some sort of real exchange rate band...there were fears with inflation going up and the dollar being as strong at it is, it would begin to veer away from this fair value," he said.

"So the RBI is being cautious to keep the rupee to this fair REER target," he said. The rupee has been relatively stable compared to other regional currencies, shedding just 3 percent in the past 12 months. By contrast, the Thai baht has lost 3.7 percent and the Indonesian rupiah 15 percent since the beginning of January.

BIGGER WORRIES: The rupee's recent fall was only an adjustment, and investors were likely to be more concerned about economic reforms and an ongoing drought in some parts of the country, Sanyal said. "The bigger concerns are on different fronts and not the rupee. The bigger concerns continue to be... the reform process (and) what happens to the drought situation," he said.

"These concerns are far more important from the investor's perspective." The drought, said to be the worst in a hundred years, has raised concerns agricultural output and rural incomes will fall, dampening the consumption-led recovery that has underpinned a turnaround in industrial growth rates.