Rupee bank notes (Photographer: Dhiraj Singh/Bloomberg)

Rupee Falls Even As Government Refutes Devaluation Reports

The Indian rupee, which fell sharply in early morning trade, recovered partially after government officials clarified that they had no intention to devalue the Indian currency.

Earlier this morning, CNBC-TV18 reported that government representatives are likely to meet on September 20 to consider a possible devaluation of the rupee.

The rupee fell to an intraday low of 67.06 per dollar compared to the opening value of 66.87 per dollar. Quick clarifications from government officials helped only marginally as the currency closes at a two-week low of 67.03 per dollar, 0.19 percent lower than the previous close of 66.90.

Commerce Minister Nirmala Sitharaman denied any conversations over a possible devaluation of the rupee on her official twitter accounts even though the Indian Express reported on September 12, that the Ministry of Commerce has suggested a “formal institutional mechanism” to determine the right value of the rupee.

In a separate report on Thursday, PTI, quoting unnamed government officials, said that the Commerce Ministry has suggested that a mechanism be formulated to ensure the rupee-dollar exchange rate reflects a realistic value of the domestic currency.

That suggestion has come in the light of persistent weakness in exports. Between April and July 2016, exports dipped to $87 billion as against $90.27 billion last year.

The Reserve Bank of India (RBI), however, has argued that the value of the currency is not the dominant factor behind weakness in export growth, which is also impacted by global economic conditions. In July, former RBI governor Raghuram Rajan had dismissed calls for a weaker rupee.

“Some of our emerging market counterparts, for example Brazil, which have had significant devaluations, haven’t necessarily seen a tremendous expansion in their exports. So we have to be a little careful in saying devaluation is the answer,” Rajan had said.

Calls for a weaker currency are also partly linked to the level of the real effective exchange rate (REER) index which suggests some overvaluation. The 36-country trade weighted REER is currently at 113 levels. A level of 100 would suggested a fairly valued rupee. However, since India is a net importer, a level of 105-106 is typically seen as best suited for the economy.

“In our assessment, the INR (Indian Rupee) is overvalued on REER basis considerably. Our projection for INR has been maintained at 68-70,” said brokerage house Emkay Global Financial Services in a note on Thursday. Emkay added that the $26 billion in foreign currency non resident (FCNR) deposits raised by the country is 2013 have led to some overvaluation of the rupee.

The FCNR deposits are due for redemption between September and December.

While the debate over the value of the rupee continues, the government has been quick to clarify that there is no change in India’s policy of maintaining a market driven exchange rate.

Economic Affairs Secretary Shaktikanta Das said that the rupee’s value is not determined by an administered rate, and that there is no plan to change the policy.

Rupee Falls Even As Government Refutes Devaluation Reports

“A devaluation is not possible in the current scenario but the government may favor some depreciation in the rupee in the current context since the rupee is overvalued on a real effective exchange rate basis,” said Samir Lodha, managing director at QuantArt Market Solutions.