The Hindu Business Line : On purchasing power parity, the rupee is undervalued substantially

Chennai, June 25 The rupee appreciation story is showing no signs of leaving the limelight. Industry, Government and other stakeholders are battling with the fallout of the domestic currency's sudden spurt — about eight percentage points in the past few months — and debating where it is headed in the medium term.

Dr Manoj Vaish, President & CEO (India), Dun & Bradstreet Information Services, foresees a "secular trend" of a stronger rupee continuing over the medium term (Dun & Bradstreet is a provider of business-to-business credit, marketing, purchasing, collection services and decision-support services).

Speaking to Business Line on the basis of his reasoning, he said that while the Reserve Bank of India has been "extremely effective" in having full control over the rupee value in the past, it may not be able to do so as absolutely from now, due to two reasons.

"The capital account surplus would far exceed the current account deficit in the coming years. The size of trade and current account flows, the balance of payments surplus and the cost of intervention are increasing to an extent that it may just be getting out of hand for the RBI to fully control the value." On purchasing power parity, he said that the rupee is undervalued substantially; "but for RBI intervention, the rupee would have been much higher by now."

Rupee futures

Another development on rupee price discovery has been the commencement of international trading of the currency. "While rupee non-deliverable forwards (NDF) have been around for a long time, the market size has been small. For the first time, a regulated exchange — Dubai Gold & Commodities Exchange (DGCX) — is introducing dollar/rupee futures."

According to Dr Vaish, this will have its own implications for price discovery on the rupee, as players who have not been able to participate in the forward/future markets in India will now be able to do so. "If the market becomes liquid and trades at a significantly different value in this market, it will have a major impact on hedging pattern in India and consequently, the rupee's value here."

On the rupee's rise, he said that it is likely to be smooth over a period of time and not "jerky or immediate".

According to him, this should give corporates enough time to take appropriate hedging strategies on one hand and cost control on the other.

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