The rupee is still overvalued despite a revision in the basket of currencies for computing the real effective exchange rate. The Indian currency was overvalued by 7.63 per cent on November 25 on the basis of the revised six-currency REER with 2003-04 as the base year.
This is the latest figure released by the Reserve Bank of India in its December 2005 bulletin today, which gives a detailed description of the revision in the nominal effective exchange rate and the REER based on India's changing trade pattern.
This essentially means those corporations that have dollar receivables will gain. Similarly, importers from the Eurozone will also gain. "It all depends on which currencies your invoices are in," said a dealer.
The RBI said the revision in the indices was prompted by the introduction of the euro with effect from January 1, 2002, and by a shift in India's trade across countries and regions, mainly towards developing and emerging economies, during the last decade. The new six-currency indices use three-year moving average trade weights in place of fixed trade weights.
The rupee had depreciated to around Rs 45.78 per dollar on November 25 from Rs 44.89 in mid-October. The rupee on Friday closed at 45.33/34, against 45.42 yesterday. Over the last three days, the Indian unit gained close to 1.5 per cent on the dollar.
The rupee appreciated against the yen to around 38.40 per yen on November 25 from 39.17 in mid-October. Against the British pound, the rupee had marginally depreciated to 78.84 from 78.78 in mid-October. The euro too was marginally higher at around 53.88 on November 25 compared with 53.95 in mid-October.
The rupee was overvalued by 7.50 per cent in mid October 2005 according to the six-currency REER, against 8.84 per cent around the same time on the basis of the previous five-country REER. According to the six-currency index, the rupee was overvalued by 7.64 per cent in October.
The RBI has revised the indices by replacing the French franc and Deutsche mark with the euro and by including the Chinese yuan and the Hong Kong dollar. The US dollar, yen and sterling continue to be part of the new indices.
The 36-country NEER and REER indices have also been revised to include Hong Kong, Denmark, Iran, Kuwait, Qatar, Russia, South Africa, Sweden and United Arab Emirates. With the inclusion of the euro, the new 36-country indices include the 12 countries that have euro as currency, effectively representing 47 countries.
The six main trading partners accounted for around 40 per cent of India's total foreign trade in 2004-05 against 22 per cent covered by the five-currency indices.
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