The Hindu Business Line : ‘The dollar is being undervalued’

Mumbai, Nov. 20 Interview with Professor Anant Sundaram, Faculty Director of Executive Education, and a professor of finance at the Tuck School of Business at Dartmouth College.

On rupee appreciation:

More than the rupee appreciating, it is the dollar that is depreciating against a basket of currencies. The US economy is doing well and the real estate crisis has also been in check compared to other countries like Shanghai and Paris where it is prominent. The latent crisis is much worse in other parts of the world. The sub-prime crisis is there, but it has slightly recovered in the sense that we have been through worse. So I am a little surprised as to why the dollar is depreciating. It is probably the trade deficit that is catching up, after 25 years, but it contradicts the fact that the government deficit in the US has been marginal.

On the Chinese currency:

Another currency that is pegged really close to the dollar is the Chinese yen. Currently, the yen is also depreciating, making Chinese exports very competitive. This in turn, is putting pressure on countries like India and Mexico.

India perspective:

It is possible that the rupee is over valued because the interest rates and inflation are higher than that in the US. As the rupee is appreciating, India is importing more. That should have a depreciating effect on the rupee. But imports have not become cheaper because commodity (oil, gold, aircraft) imports are priced in dollars. If oil prices increase, the dollar starts depreciating. For example, earlier if one barrel of oil was priced $30 at level X, and today one barrel is at $60 at level 1/2X, one still has to pay the same amount — $30 — for one barrel. So, nobody is getting a kick out of price reduction.

Going forward, a reverse phenomenon is bound to happen where the dollar will bounce back and rupee will go back to its position. The bottom line is that the dollar is being deeply undervalued. It is still the vehicle currency and there are many factors driving it. It is bound to start appreciating again.