Rupee Bullish, Hits 62 but Steep Fall in Sight

Since the beginning of 2017, the domestic currency has appreciated more than five per cent against the dollar.

According to the report, real effective exchange rate (REER) of rupee shows it is quite expensive against the basket of currencies it is measured. REER is measured as the relative strength of rupee against its trade partner. Indeed, between March 2016 and February 2017, the REER of rupee has been on an incline.

REER value

REER of the rupee is stable between January and February. REER for rupee has risen only 0.8 per cent against the dollar, compared with Mexico’s 5.1 per cent. However, rupee’s Asian peers have seen their REER falling against the dollar. Thailand has fallen 0.2 per cent, Indonesia has fallen 0.8 per cent and China’s REER against the dollar has fallen 0.9 per cent. This may indicate that rupee has a scope to fall even though it has strengthened as dollar is weakening.

Dollar index, which measures the greenback’s strength against major global currencies, has fallen to 99.294 against 102 in the start of March. The bullish trend has weakened, Euro has risen against dollar.

Rupee weakness could push India’s export growth, specially to East Asia.

The Reserve Bank has limited scope to intervene in the currency market, considering huge liquidity surplus after demonetization. But once this liquidity slowly neutralises, the central bank can intervene more actively to weaken the rupee.

Some say that the rupee could appreciate to 62-63 level by June-July but others see a sharp fall to 70 by end of this year.

This could mean that rise in stocks will be short lived if the rupee falls in future.