Rupee has fallen both in nominal and real terms against a basket of currencies in 2015-16

But if you consider the last two years, then the Rupee has risen 

 RBI Watch                                                                                               Indian Rupee

The tables below give the performance of the Rupee against a basket of currencies both in nominal and real terms for the last one year, and also for the last two years.

To get a flavour of what transpired over the last one year, please also see my blogs of December 18, 2015 and September 15, 2015.

 The bottom line is the following:

The Rupee is overvalued in real terms, but over the last one year the overvaluation has moderated.  In real terms the Rupee fell by 1.36%.

The RBI has contributed to a more competitive Rupee – by buying U.S. Dollars and selling Rupees in the interbank market as part of its fx intervention. This it has been confident of doing as inflation has trended down, and providing liquidity to the Indian market made sense, as part of an accommodating monetary policy to support growth of the economy.

To get another perspective, let’s look at the picture over the last two years. The picture is different: in real terms the Rupee has strengthened by about 7%. This is significant.

The message is clear: under present circumstances the RBI could well contribute to a more competitive Rupee by continuing to buy U.S. Dollars and selling Rupees. This is consistent with the macro context: RBI expects inflation to fall further, even as a continued acceleration in growth requires more liquidity in the Indian market.

RBI’s interventions are primarily against the U.S. Dollar. This would suggest a weaker Rupee against the U.S. Dollar in the coming year. But this calculation could be over turned if capital inflows are so great that the RBI is forced to prevent the Rupee from appreciating, in which case the Rupee may see not much change against the U.S. Dollar this year, 2016-17.

When could this occur?  Here are three possible scenarios: India’s growth picks up far greater than expected, Federal Reserve puts interest rate increases on hold, and China solves its macro problems smoothly.

The numbers below give the performance of the Rupee against the four major currencies - the U.S. Dollar, Pound Sterling, Japanese Yen and the Euro.

During the last year, the rupee fell against all the four currencies, more so against the Euro and Yen. However, over the last two years the Rupee fell only against the Dollar, strengthened against the pound and euro, and remained stable against the Yen.