Re overvaluation may ease as RBI steps in

In August, other currencies appreciated, but rupee remained at the same level. We expect this overvaluation figure to come down. To what extent, the figure will only be known in the next RBI bulletin on September 18 - Anil Kumar Bhansali, ED, Finrex Advisors, tells Bizz Buzz

Forex Dynamics

♦ In last June, REER was at 106.36 indicating Re overvaluation by 6.36

♦ RBI constantly buying dollars

♦ Recently, when Re rose to 83.75, RBI bought $1-bn worth dollars

♦ Forex reserves at $675 bn on Aug 5

♦ RBI allows exporters to get better rates, while imports are curbed to some extent

Mumbai: The continuation of rupee overvaluation keeps RBI on tenterhooks as the home currency is overvalued by over seven per cent. The local unit is overvalued by almost one per cent in last one month and it prompted the Reserve Bank of India (RBI) to extend support to Rupee. RBI bought about $1 billion on last Monday. These measures are indicating that RBI is keen on curtailing rupee overvaluation, observe forex experts.

Talking to Bizz Buzz, MV Hariharan, ex-treasury head, SBI says: “While any freefall or appreciation of the INR is always frowned upon by RBI, the gradual, but calibrated weakening of the rupee to reflect the economic fundamentals, global trade balance and inflation adjusted value are the drivers for RBI.” While the INR will be in a range, but for any unexpected interruptions and triggers, it’s slowly inching down. Any hopes of regaining 83/$ level are misplaced and misconceived as well as misguided, he said.

In last June, the REER, which is rupees’ value against a basket of 40 currencies on trade weighted basis, was at 106.36, which means rupee was overvalued by 6.36 against a base in 2016 of 100. An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness. In the month of July 24 the overvaluation increased to 107.33. In the year 2022-23, the average overvaluation was to the extent of 102.86, while in 2023-24 the same was 103.71.

Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Advisors, said: “RBI would like the rupee overvaluation to remain at this level and allows depreciation of the currency when overvaluation exceeds to this extent. RBI has therefore been buying dollars to ensure that rupee does not strengthen too much.”

Possibly in August, other currencies have appreciated, but rupee is at the same level, we expect this overvaluation figure to come down. To what extent, the figure will only be known in the next RBI bulletin on September 18, he said.

A couple of days ago when rupee rose to 83.75/$, RBI bought 1 billion US dollars. RBI has been constantly buying dollars and it’s clearly visible in the forex reserve figures, which were at $610 billion on August 4, 2023 and have now gone up to $675 billion. RBI also has an advantage in buying dollars as it allows exporters to get better rates, while imports are curbed to some extent. Defence, oil, government repayments, coal, fertilizers and FPIs outflows can’t be controlled, so only imports that can be controlled are consumer and intermediate goods imports which the government wants to reduce by Make In India campaign.

By buying dollars, RBI has three advantages- exporters getting better rate, fall in imports, REER coming down and its reserves value in $ and rupee going up. The REER may not be a very effective tool in deciding on the timing of interventions, though it remains useful in assessing the directional movements of the rupee vis-à-vis a basket of other currencies.