‘Intrinsic value’ is 58-60 a dollar; have enough ammunition to tackle speculative attacks
The Finance Ministry has said that the current rupee-dollar exchange rate does not reflect the real value of the currency, which it says is much higher.
It sees the rupee’s intrinsic value (in real effective exchange rate or REER terms) at Rs 58-60 to a dollar.
REER reflects the rupee’s strength vis-à-vis the currencies of trading partners.
It does not factor in the domestic and international sentiments, which have a bearing on the nominal value.
“ The intrinsic value (of the rupee) comes from its purchasing power. This could be between 58 and 60,” Arvind Mayaram, Economic Affairs Secretary, said.
The Finance Ministry has also allayed fears of the rupee plummeting against the dollar when the US Fed begins to taper its easy money programme or quantitative easing (QE).
India has enough tools to counter such a situation, said a top policymaker.
“I do believe…when tapering happens, there will be outflow of capital. But the fact also remains we have enough ammunition in our hands. And therefore, there is no room to be fearful of the rupee tanking,” Mayaram said.
India has $270 billion in forex reserves, he said, adding if the current trend continues there could be additional inflows of about $40 billion this fiscal year
These remarks are significant as they come at a time when the rupee, after being battered by capital outflows since May 22, has strengthened to Rs 62-63 levels.
According to Anis Chakravarty, Senior Director, Deloitte, macro-economic corrections will take three to four months and it is too early to estimate a trend for the rupee. The rupee’s nominal value (in the market) is lower than the REER, he said.
Expectations that the US Fed would partially withdraw its existing stimulus — about $85 billion of bond buying a month — had led to capital outflows, resulting in a sharp depreciation in the rupee and a steep fall in stock prices.
But the positive surprise of the US Fed in continuing with the stimulus brought cheer to Indian equities and also the rupee.
After hitting an all-time low of Rs 68.8 to a dollar last month, rupee today closed at Rs 62.60 to a dollar.
Mayaram said Foreign Direct Investment (FDI) this fiscal is expected to be around $36 billion. In the first quarter, net FDI flows into the country stood at $9 billion, which is 70 per cent higher than the FDI inflow in the first quarter of the last fiscal.
On growth, he said, “We are not satisfied with 5 per cent growth rate. India’s potential rate of growth is 8 per cent. In the next two years, India will again start growing at 8 per cent.”
On reports of the government mulling a special window to lend funds at lower rates of interest to corporates in certain sectors, Mayaram said, “I have not heard of any such plan.”