Is INR overvalued, undervalued or perfectly valued? It depends how you look at it. I am chartist and I look everything from perspective of charts. Here's my take on current state of INR
When Narendra Modi won elections in May 2014: INR sharply appreciated to 58.5 but then reality took over: End of QE, weak Euro and Strong Dollar. The world witnessed one of the most unprecedented rally in USD index. Here's USD index chart since May 2014 -
What is USD index?: The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.
The USD index was at 80 on May 16 2014 and right now stands at 94 (rally of 18%). It means technically INR should also have been down in vicinity of 18% or at levels of Rs. 69 vis-a-vis USD. But what's the reality. INR is at 62.2. It means a depreciation of just 6.3%. That's an outperformance of enormous magnitude in currency world.
Domestic currency may have depreciated against the dollar, but compared with a basket of currencies, the “rupee has actually been quite strong...Raghuram Rajan, RBI Governor
Look at quantum of appreciation of INR against EUR. Here's EURINR chart since May 16
As you can see in the chart above: 1 Euro = 80 INR in May 2014. Today 1 Euro = 70 INR. It means INR has appreciated 12.5% against Euro. The appreciation against British Pound has been only 3%. That's not all - INR has appreciated 11.5% against Japanese Yen. So while INR has depreciated 6% against USD but has seen significant appreciation against Euro, Japanese Yen and British Pound
Here's the thing: Looking at INR vis-a-vis USD can give you a very distorted view of INR. INR has sharply appreciated against all currencies except USD in last six months and that's just not a sustainable trend.
Fundamentals: INR is overvalued
First - Let us look at REER
The “real effective exchange rate” (REER), is the weighted average of a country’s currency relative to an index or basket of other major currencies adjusted for the effects of inflation. REER index measures a domestic currency’s competitiveness against other major currencies. REER above 100 indicates relative strength of the currency The 36-currency basket REER for rupee now stands at 111.46, which means INR is overvalued, or stronger, by 11.46% . That's not very good news for exporters and Make in India campaign. How can a country be competitive with such strong currency. We cannot afford huge trade deficits.
Theoretically the rupee should depreciate but there is no guarantee it will. Currency is the stock of the Nation
Big Picture: INR has settled in a range when it comes to USD
As you can see in the chart above: INR has settled in a range between 58.5 and 64. Technically, if we analyze more - there is a support at 50 week ma
It means in near term - any appreciation in INR will face resistance at 61 and INR is more likely to stabilize at 61 on strong budget. On other hand a disappointing budget can push INR towards 64 again. Big picture - INR is in a range. It may be depreciating against USD but today INR is one of the strong currencies in the world if you look at it against basket of currencies.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers