Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Rupee Undervalued With Ample Scope For Appreciation, Says Nomura

The Indian rupee is undervalued by nearly 7 percent relative to the dollar with ample scope for appreciation in the coming year, Craig Chan, global head of emerging markets and foreign exchange at Nomura said.

There is substantial room for the rupee to appreciate amidst a positive global environment of relatively low inflation and fading fiscal slippage concerns, Chan told BloombergQuint in an interview. Nomura has pegged the rupee at Rs 63 against the U.S. dollar for the first half of 2018 and Rs 63.50 in the remaining half, he added.

The rupee has appreciated around 5.6 percent against the U.S. dollar in the year so far, raising concerns that is is overvalued. However, for the Japanese financial major, that follows a foreign exchange model that looks at the real effective exchange rate with adjustments pertaining to productivity, the rupee remains undervalued.

However, rising crude oil prices pose a potential risk to any appreciation in the curreny Nomura noted. “According to our analysis, the current account deficit would be around 2 percent of the gross domestic product, so there will be significant widening due to rising oil prices,” said Chan. Nevertheless, the brokerage is hopeful of FDI and portfolio inflows to make up for most of the deficit. Nomura has pegged the price of oil at $65 per barrel in the coming year.

Commenting on the kind of portfolio investments that India is likely to attract, Chan said that the bond market is unlikely to suffer any significant shocks with the Reserve Bank of India working towards inflation control. On the equity side, India’s growth averaging at 7.5 percent as per Nomura’s forecast is expected to ‘serve as a huge impetus for capital gains,’ said Chan.

Watch the full conversation here: