The future value of Indian Rupee – Is the current exchange rate justified? By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 13, 2016 | Posted by bobbysrinivasan << back to blog

Janet Yellen the US Federal Reserve Chairman has announced recently (Aug 20, 2016) that she is ready to nudge up the US interest rate (Fed funds rate) from the existing 0.25%. She is awaiting the August non-farm payroll data. The number which is due on 2^nd September 2016 is strong. She may decide to push up the interest rate. Even without it by December 2016, the interest rate would have been pushed up.

What is India going to do? Will it go along with the US and move up the interest rate or let the value of rupee go down? Remember every country will be forced to act because the US dollar is a de facto reserve currency when it is officially not. Given that there is already immense pressure on RBI to lower the interest rates hiking it would bring in huge protest. So RBI will allow the currency to float and intervene using their US $ 365 billion reserve. Bear in mind also that there is a liability of US $ 550 billion against it.

If there is anything to learn about the Indian currency exchange the following historical data will give some idea as to where the rupee is heading

Year	Exchange rate against the dollar
1950	Rs. 4.79
1955	Rs. 4.79
1960	Rs. 4.77
1965	Rs. 4.78
1970	Rs. 7.56
1975	Rs. 8.39
1980	Rs. 7.86
1985	Rs. 12.36
1990	Rs. 17.50
1995	Rs. 32.42
2000	Rs. 44.94
2005	Rs. 44.09
2010	Rs. 44.50
2011	Rs. 54.32
2012	Rs. 57.32
2013	Rs. 68.80
Sept 1, 2016	Rs. 67.20

Several observations can be made from this data,

The value of Rupee against the dollar has a very low probability of going up.
RBI is willing to let the value of rupee go down slowly without much volatility.
The value of rupee drops significantly like for the periods 1980 to 1985, 1990 to 1995 and 2012 to 2013.
Based on these observations it is possible to conclude that the next time the rupee drops it will end up in the mid 70s.
Infact the real effective exchange rate should already be above Rs. 72.

There are other observations that are relevant.

Our exports are continuing to drop for the last 20 months with no end in sight.
Slowdown in our trading partner’s economy especially China, Eurozone and Britain (after Brexit) will continue to hurt us.
Oil prices after touching $ 26 a barrel is currently hovering around US $ 45 briefly touching US $ 50. Oil imports is a major expense for India.
Selling India as a destination for FDI is only receiving lukewarm reception. We cannot expect growth.
The emerging market currencies like the Russian Rouble, Brazilian Real, South African Rand are all down 30 to 40% against the dollar. India being one of the emerging economies is a competitor for FDI. Other countries have become cheaper after their exchange rate drop.
Chinese economy is slowing down with a big drop in growth rate. They have already devalued their currency by 6.5% in 2016. A lot more is in the offing.

Based on these observations one might want to conclude that the value of rupee will be well on its way to go towards 80 Rupees to a dollar. Like in the past, it will drop suddenly and significantly. Watch for its tell-tale signs.

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