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The rupee's fall against major currencies has resulted in substantial correction in its real effective exchange rate (REER). Reserve Bank of India data show that the REER stood at 103.13 in December against the base level of 100 for 2004-05. It means that the rupee has since 2004-05 appreciated by 3.13 per cent in real effective terms against major currencies.
The REER measures the bilateral trade-weighted average exchange rate of the rupee against a basket of currencies (US dollar, Euro, Pound, Yen, Chinese Renminbi and Hong Kong dollar), while adjusting for inflation differentials vis-à-vis the countries concerned.
After March
“The rupee should stay at 52-53 to a dollar till March 2012. Any appreciation will take place only after March, once the RBI reverses its monetary tightening and there is an improvement in domestic investment environment,” says Dr Soumya Kanti Ghosh, Director, Economic Affairs and Research Division, FICCI.
Rupee depreciation happens on account of current account deficit, indicating net capital outflows. India is in fact the only country in South Asia which has a current account deficit. The rupee has depreciated by around 13 per cent since July 2011, in REER terms against major currencies. Meanwhile European banks are busy de-leveraging, with them having to meet the mandate of reaching 9 per cent of core capital requirement by June 2012.
“There is a global risk aversion. Also, at present, India's outstanding short-term debt, as a percentage of foreign exchange reserve is 43 per cent. This debt is going to mature by June 2012, so a whole gamut of negative factors is working against the rupee at present,” Mr Ghosh adds.
Dr S. P. Sharma, Chief Economist, PHD Chamber of Commerce and Industry, expects the rupee to stabilise at 49-50 to a dollar by January end. “The weakening of the rupee is also because of the comparative strength of US economy vis-à-vis the European economy.
“Because of the fear of recession, FIIs are pulling out of the emerging markets. However, with the much anticipated monetary relaxation of the RBI and subsequent capital inflows, the rupee should start appreciating by March end,” he says.
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