The rupee’s recent underperformance against the US dollar, boosting India’s export competitiveness, could well be the intended outcome of calibrated central bank action to correct what it perceived as the local unit’s overvaluation after the real effective exchange rate (REER) had climbed to a near four-year high in June.
After having gained against the dollar in June, the rupee has continued to slide against the greenback through July and early August, with money market experts explaining the trend to possible Reserve Bank of India (RBI) steps that sought to restore the rupee’s export competitiveness by reducing its relative overvaluation against competing currencies.
“It’s on the mind of the top management of the RBI and the overvaluation has now come down,” said a source aware of the matter. “A combination of things, such as the movement of other currencies and RBI market interventions, have brought the REER down,” the source said.
An email sent to the RBI remained unanswered till press time.
The REER measures a currency vis-a-vis a basket of other monetary units using an average determined by looking at trade balances of the currency against the other units in the basket. A higher REER results in exports becoming more expensive, reducing competitiveness.
Latest RBI showed the rupee’s trade-weighted REER against a basket of 40 currencies was at 106.54, indicating an overvaluation of more than 6%.
