The value of the Rupee: update as of August 2015

RBI Watch                                                                                               Indian Rupee

August was a momentous month in the currency markets: China moved towards a more market determined yuan rate - this led to a 2% depreciation of the currency on August 11, the largest in two decades.

During the month, the rupee weakened 3.5% against the US dollar, and also fell against the pound sterling, euro, and japanese yen.

Over the last one year, emerging market currencies have fared poorly against the U S dollar - some are at all-time or close to all-time lows. In this context, the rupee's performance has been relatively good. 

The last one year has also seen a huge outflow of capital from the emerging markets. Here again, India has fared relatively better.

As at the end of each month, the two tables below shows the rupee in nominal and real terms against a 36-currency trade weighted basket. The bottom line is that the rupee continues to be overvalued in real terms.

The RBI's stated policy is not to set a target level for the rupee against the dollar, but to only intervene in the markets to smoothen the volatility of the currency. 

Given the possibility of turbulent times in the financial markets in the months ahead - a rise in interest rates in the US, and the possibility of a China shock are two possible sources of turbulence – the rupee could well be under renewed downward pressure. Using the foreign exchange reserves to defend the currency could be appealing, but would be perhaps counterproductive. 

A more competitive rupee could give a boost to the economy, and given the falling inflation trend is unlikely, on balance, to create inflationary pressures.