The Economist’s latest Big Mac Index has come up with a survey and declared Indian rupee to be the most undervalued currency. Currently rupee trades at around 61 percent below its actual price against dollar. 8 out of 10 Asian currencies are undervalued. The currency rating was done by analyzing how a particular good will carry different values in different countries. McDonald’s popular burger was t he chosen one to evaluate the costs of the same burger in different countries. Through this the effective purchasing power of different currencies is measured.
Swiss Franc and the Norwegian Krone which had a currency index more than 60 percent were the two countries which were overvalued compared to the U.S. dollar. Further down were Sweden Brazil with over 40 and 30 percent overvaluation.
Indian Rupee has been hitting the ground for the last two years. Ukraine, Hong Kong and Malaysia are close at over 40 percent undervaluation. China’s Yuan is the fifth most undervalued currency with over 40 percent overvalued with regard to U.S. dollar.
The last six months have witnessed 17 percent value depreciation of the rupee, which makes it more undervalued than Chinese Yuan, which is estimated to be standing at 41 percent. China has been under continuous pressure from U.S. to appreciate its currency and shift to a market-based exchange rate mechanism.
Big Mac has come up with a comparison between the prices of burger in the U.S., where it’s currently sold for $4.20. But in India the Maharaja Mac is priced at 84. The exchange rate of 51.90 to a dollar costs a burger in India for $1.62. The purchasing power parity (PPP) comes out at 20 when we divide the local price i.e. 84 by the U.S. price, i.e. $4.20. The currency is overvalued or undervalued can easily be calculated through the difference between PPP and the exchange rate. Previously when Big Mac Index came up with this statistics, the Indian rupee was trading at around 44.40 percent to a dollar, and was undervalued by 53 percent.
However, cheap burgers cannot be the deciding factor to know if a currency is overvalued or undervalued. There are different factors which states why a currency is overvalued or undervalued such as government policies hinder normal equilibration of exchange rates. Also the labor costs come into picture which plays a vital role in different countries.
Ajit Ranade, Chief Economist at Aditya Birla Group tweeted, “Reversal inevitable.” D K Joshi, Chief Economist at rating agency CRISIL added, “It is a proxy indicator and it does not signify much. But given our growth potential, capital inflows are expected to increase and there will be an appreciation bias.” An appreciation is on bet by most of the foreign exchange dealers, but the situation in Europe is under a close watch. The slower growth rate and perception of policy paralysis has shied off many foreign investors from Indian stock market, FIIs has withdrawn around 3,800 crore from the share market.
- Latest Big Mac Index on Currency Undervaluation and overvaluation (nextbigfuture.com)
- Rupee falls to record low of Rs. 53.29 per U.S. dollar (thehindu.com)
- Rupee loses 17 paise in early trade (thehindu.com)