Falling real effective exchange rate to boost exports

According to experts, the government and the central bank also want this gradual depreciation

The rupee is on a downward path since March against most major global currencies, as indicated by its real effective exchange rate (REER), which is good news for our exporters.

The REER for a six-currency trade-based weight and a 36-currency one was at an all-time high in March. It came down in April and, say experts, dropped further in May.

The rupee was the best performer among emerging market (EM) currencies in 2014. The REER for the six-currency and 36-currency trade-based weights was at 126.04 and 113.15, respectively, in March. This dropped to 125.24 and 111.70 in April.

“The rupee has depreciated against many currencies. It might not emerge as the worst performer (among EM currencies) because the real interest rate is strongly positive. As long as it stays so, we have an anchor for the rupee. The current account scenario shows the external funding needs are low. That will also support the rupee,” said Anindya Banerjee, currency analyst, Kotak Securities.

On August 28, 2013, the rupee was at an all-time low of 68.85 to the dollar in intra-day trade; the REER for six-currency and 36-currency trade-based weights had dropped to 107.76 and 99.41, respectively. The REER for 36-currency trade-based weights had in fact fallen further in September 2013, to 99.26. Various steps by the government and the Reserve Bank of India (RBI) had helped it to recover from there.

A gradual depreciation is seen as a positive trend. “There is a trade gap and we want our exports to pick up. A weak rupee will be good for exports. But, at the same time, if it depreciates considerably, there would be a pressure on capital outflow. RBI will be intervening to reduce the volatility. But, over a period of time, the rupee may depreciate,” said Ashutosh Khajuria, president (treasury), Federal Bank.

According to currency experts, the government and the central bank also want a gradual depreciation, being beneficial for exports.

On Thursday, the currency ended at 63.64 to the dollar, compared with Wednesday's close of 63.83. The dollar fell against major currencies after the US Federal Reserve's minutes of its April meeting revealed a rate rise in June was ‘unlikely’, due to concerns on economic growth.