What Is The Fair Value Of Rupee? 65, 75 Or 80?

The recent steep depreciation of the Rupee has created headlines.

Though the up move in USD/INR has been swift, there is no real reason for alarm as Rupee has just depreciated in line with weakness in the broader EM basket. On Year-To-Date basis, the Rupee has depreciated ~10% while comparable currencies such as the Indonesian Rupiah and the Philippine Peso have depreciated 8.2% and 6.7% respectively. Rupee simply reacted more as it had more catching up to do. When the broader USD sentiment turned around, Rupee was late to react. Despite the recent weakness, the Rupee still continues to remain overvalued in REER (Real Effective Exchange Rate) terms.

A USD/EM or USD/Asia move is not uncommon during a US rate hike cycle when shorter end US rates start heading northward (Refer to our article published in May where we had highlighted upside risks to USD/INR with a target of 71-72). The unwinding of carry-trades and a concerted exodus of hot money causes sharp moves. The ongoing trade tensions between the US and China have dented risk sentiment globally. The People’s Bank of China has used Yuan devaluation as a tool to offset the trade tariffs imposed by the US and to keep their exports competitive. The weakness in the Yuan has spilled over to other Asian and EM currencies. In addition, sanctions on Turkey and the economic crisis in Argentina have further exacerbated the move in the EM space.