India’s balance of payments, a measure of how much the country is dependent on money from abroad, has been squeezed by a record trade deficit that prompted economists to rethink its current account deficit and balance of payments (BoP) projections. has done.
“India’s CAD (current account deficit) tracking at 4% of GDP is historically a huge number. If left unchecked, it should reflect on the rupee’s value. But things are not unchecked, And the RBI is managing the rupee,” Arindam Sandilya told Reuters in an interview.
“Taking a holistic view on India’s foreign currency-relevant BoP position and the RBI, we believe the fair value of the rupee is around 80.”
India’s foreign exchange reserves have declined to $570.7 billion from a record high of around $642 billion in September 2021 as the RBI moves to strengthen the rupee. Still, the local currency is down 7.5% in 2022, and is on track for its worst annual performance in four years.
The rupee was trading at 79.85 per US dollar on Monday, having hit a record low of 80.0650 last month.
Rise in inflows in Indian stocks in the past few days, foreign investors becoming first-time buyers in nine months helped the rupee to some extent.
Sandilya believes JP Morgan’s fair value was around 81-82 at the start of the current quarter, but the surprising change in equity inflows has prompted it to re-evaluate its fair value closer to 80.
He said the rupee’s valuation remains “slightly prosperous” relative to other emerging market (EM) currencies and that short positions of the rupee are potentially “more runway”.
Shandilya pointed out that the US Federal Reserve’s next year’s market pricing is contrary to what the policy makers have said recently.
On how much the recent fall in oil will help the rupee, Sandilya said that when there is a demand-side fall in oil prices, emerging market currencies, including oil importing countries, weaken.