1 USD = 67.95 INR
As you can see in the chart above: USDINR has been steadily depreciating over last 18 months and is trading at the weakest levels since August 2013 when it briefly touched 69. The big question everyone seems to be asking: What's the fair value of INR?
Is INR undervalued or overvalued?
As per RBI, the INR is overvalued against a basket of 36 currencies on a trade-weighted basis by 12.8% as of December 2015. It was only 8.4% overvalued by Dec 2014. It means over last 12 months - INR has become more expensive compared to the rest of the world and needs to depreciate for export competitiveness. Export figures have been sliding pretty dramatically for India.
Even if you ignore export - there is a very strong argument for depreciation purely on import substitution. Why? Because people will stop manufacturing in India if currency remains so overvalued as import will be the easy way out. It then will impact job creation and economic activity. In the world where there is so much of excess capacity and tremendous pressure on prices, the last thing you want: overvalued currency.
The Fair Value of INR based on RBI's measure = INR 74-75 levels
What can happen?
In Financial markets, nobody knows what will happen. All we can do: visualize and tell what can happen. INR is overvalued in the current Global environment and it seems like the depreciation trend will continue and it's not bad for our economy.
The context matters...
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