Weak Dollar Vs Euro Likely To Keep Rupee Strong

The weakening of the US dollar against the euro is likely to keep the Indian rupee strong in nominal terms, as it has for most part of July.

But the dollar weakening has also wiped out the relative over-valuation of the local currency -- in real terms -- in recent times, with the net result that Indian exports are that much more competitive in the global markets.

The rupee has lost only a little over one per cent since April 2001. Dealers and economists are unanimous that despite the weakening of the dollar against the euro and depreciation of other Asian currencies, the Indian unit is likely to continue strong. Dealers said the dollar weakening is good news for exporters to the Euro zone as they get more dollars for every euro billed.

However, in real terms, the rupee will continue to depreciate. Says a recent JP Morgan Securities India report: "A significant contribution to the rupee's stability is the dollar's weak performance against the other major currencies. Indeed, the rupee went from being an undervalued currency to an overvalued one primarily because of the dollar's strength over the last one a half years. However, this trend now appears to be reversing. Over the last one month, the dollar has lost around 6.9 per cent in value versus the euro, 4.5 per cent versus the yen, and 2.8 per cent versus the pound sterling."

"As a result, the extent of the rupee's over-valuation has dropped from 4.1 per cent to 1 per cent. In other words, the rupee has depreciated sharply in real terms over the period," it adds. The depreciation in real terms adds to the competitiveness of Indian exports, dealers said.

The JP Morgan report also says, "The recent trend is likely to continue...dollar bearishness has escalated over the last few days and ... the dollar is unlikely to rebound in the current quarter, except against the yen. Thus, pressure on the rupee on this count will remain subdued."

The coming months are expected to see an appreciation in values of other Asian currencies, as the dollar would see a correction in its value. Economists in the US strongly feel that US must scrap its 'strong dollar policy'. "Research reports released in the beginning of 2001, indicated that large corrections were expected in the euro-dollar exchange rate but for whatever reasons, those corrections have still not happened," one dealer with a private bank said.

Among other currencies which has seen an appreciation against the dollar is the Singapore dollar, South Korean won and the Indonesian rupiah. Some of the other Asian currencies like the Thailand baht, the Japanese yen and Philippine peso, all have seen marginal depreciation.

The primary reason for a global effect of the slowdown of the US economy was due to the fact that most of the affected countries had a huge portion of its exports going to the US alone. Exports made up a very large part of the gross domestic product (GDP) of these countries, but for India, where exports are 11 per cent of GDP and out of that only 2 per cent goes to the US, getting directly affected might not see such huge proportions.