Rupee: Most Undervalued Among all Currencies

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.

Related articles

• 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)

RBI to Issue Rs.100 Notes With Re Symbol

The Reserve Bank will shortly issue 100 notes which will have the rupee symbol.

The Rs 100 notes will be of the Mahatma Gandhi-2005 Series bearing the signature of Reserve Bank of India (RBI) Governor D Subbarao and with the year of printing mentioned on the back of the banknote, the apex bank said in a statement.

The design of the notes to be issued is similar in all respects to the existing 100 in Mahatma Gandhi Series-2005 issued earlier except for the rupee symbol.

However, all the Banknotes in the denomination of 100 issued by the RBI in the past will continue to be legal tender.

Last week, the RBI had announced that it will soon introduce notes of 1,000 and 10 denomination featuring the rupee symbol.

The Indian rupee got an unique symbol a blend of the Devanagri ”Ra” and Roman ”R” last year joining currencies like the US dollar, euro, British pound and Japanese yen in having a distinct identity.
The new symbol, designed by Bombay IIT post-graduate D Udaya Kumar, was approved in July 2010.

Indian Rupee Getting Cheaper: Opportunity or Curse?

The day has come where the Indian rupee bagged the title “Asia’s worst performing currency” when it hit rock bottom of 52.73, a 16.8 percent weaker than its 2011 high reached in late July. Probably India is showing consistency in only two things- inflation and currency decline. Question arises who is actually in crisis. Is it U.S. or India? Is it some gain and just lots of pain? Let’s take an areal view of the situation. The rupee suffered its second biggest fall in history.

The opportunities if rupee gets cheaper:

1. More rupees for dollars:

Families of those working overseas will get more rupees for the dollars remitted by them. If you have been working for long time away from India and want to come back and settle down the make hay while the sun Chinese. The Indian rupee will fetch you fortunes if you have someone from abroad sending you lucky charm notes. For example, One euro can get you 70 now, which is 16.5 percent more than what it did at the beginning of this year. The British pound brings 81.40 rupees now, up nearly 17 percent, and the Australian dollar can get you 51.47 rupees, 12.5 percent higher than the start of this year. The Kuwaiti dinar is worth nearly 17 percent more at 187 for every dinar. On an individual level, however, the rupee’s losses can be good for some and bad for others depending on the situation.

2. Medical Tourism in India will get a boost:

Fall in Indian currency value has created an opportunity for Medical Tourism to India as overseas patients have benefits of already low cost of treatment in India compared to U.S. and falling Indian Rupee is giving extra edge to Dollar paying patients. Calculation of packages in Rupee value has given a double bonanza to the overseas visitors visiting India for Plastic Surgery and Cosmetic Surgery, as Indian packages were already 60-70 percent less than those in US and on top of that a further 20 percent reduction due to Indian currency depreciation is an icing on cake for patients from USA and Europe.

3. Exporters will have renewed opportunity:

A cheaper rupee at a time when the Chinese yuan has been trending up against the dollar should provide exporters with renewed opportunity. The massive cost advantages that Chinese exporters seemed to enjoy will be under pressure. In any case, Chinese incomes are now much higher than India’s, and as the yuan strengthens China will be forced to exit export sectors marked by low value-addition. This presents an opportunity for Indian exporters to step into the vacuum. There should be new opportunity in everything from textiles to shipbuilding, if government policies can help producers in these sectors.

4. Diamonds and Gems makers look to capitalize:

For the diamonds and gems industry, the falling rupee coincides with the peaking demand during the Christmas-New Year season. Diamantaires in Surat, the world’s biggest diamond cutting and polishing centre, are hoping to cash in on the weakening rupee. Diamond companies import rough diamonds, paying cash and the rupee depreciation helps the industry pay out lower on imports than what it earns through export.

 ”The dipping rupee helps the industry in all the merchandize and non-merchandize jewellery export as it hedges its risk against raw material well in advance,” said Rajiv Jain, chairman of Gems and Jewellery Export Promotion Council (GJEPC).

5. Workers:

If you are an Indian working in India for a foreign company that pays you in dollars, rejoice! You get an unexpected windfall. What kind of jobs are we talking about? Well, offshore outsourcing is one example. For example, you could be writing articles for a foreign company. If you were paid $1,000 a month, for instance, you would have received about Rs 44,000 in July. Now, your income will jump to Rs 52,000, simply because of the currency fluctuation.

The biggest losers if rupee gets cheaper:

6. High food prices:

India imports a slew of food items, such as pulses and edible oil, to meet domestic demand. A falling rupee simply makes imports costlier since India now has to pay more, in terms of rupees, for the same goods and services it imports. India imports 21 percent of world’s pulses to meet domestic prices, according to Pravin Dongre, president of the Mumbai-based Indian Pulses & Grains Association. “Prices of commonly consumed pulses, which have been so far stable, will go up somewhat on the back of a weaker rupee,” Dongre said.

7. Affects Students and Overseas Travel:

The students will have to pay higher fee and living charges in rupee terms. As dollar grows stronger, students will have to pay double of what they used to pay and the cost of living will be very expensive. Overseas travel to get more expensive as you will have to shell out more rupees for the same amount of dollars while it is vice versa back home for foreigners. Even if you are planning a trip in exotic South East Asia, you will be disappointed. The rupee has slipped even against Asian currencies like the Thai baht and Singapore dollar.One Thai baht could be bought with Rs 1.52 three months ago, now you need to spend Rs 1.66. Ditto for the Singapore dollar: it was worth about Rs 38 three months ago, now it is up to Rs 40.

8. Consumers:

Bad news if you have a craving for imported goods. They are all going to get more expensive. Better buy them now before they get even more expensive later. From cars to mobiles and LCD televisions, consumers will be shelling out more for imported products. Your fuel bills could also go higher. While international crude prices have remained more or less steady at high levels, the fall in the rupee means that the country still pays more for its oil imports, which account for one-third of India’s total imports.

9. Investors:

Typically, the rupee’s slide is bad news for equity investors, because it worsens sentiment in the markets. A falling currency increases the cost of imported inputs for companies and that weighs on margins, dragging profitability lower. While, in general, a depreciating rupee helps exporters like software service providers, too much volatility in the currency’s value can also cause problems.

Related articles

• Indian Rupee Nears Record Low Vs. U.S. Dollar (online.wsj.com)
• The Indian Rupee Just Hit An All-Time Low Against The Dollar, Intervention Possible (businessinsider.com)
• India’s Rupee: Asia’s Worst-Performing Currency (online.wsj.com)