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Lokeshwarri SK Updated - November 25, 2017 at 07:08 PM.

The rupee can move between 57 and 62 in the coming months

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One measure to judge the true value of the rupee is to study the Real Effective Exchange Rate calculated by the Reserve Bank of India.

REER is based on rupee exchange rate against a basket of currencies of India’s trading partners adjusted for inflation.

It is the six-currency REER that is tracked closely by all.

The six-currency REER had retreated to 89 in September 2013, signalling that the rupee was undervalued against its trading partners then. (Any value below 100 indicates undervaluation and above 100 overvaluation).

But there has been a sharp change in the REER since February this year when the number moved from 95 to the current value of 113.6.

That the rupee was one of the strongest gainers in the period since February could have resulted in the sharp movement of the REER.

The current REER puts our exporters at a disadvantage and the RBI appears cognizant of this fact. It is perhaps for this reason that it has been stepping in to buy dollars in the forex market every time the rupee threatens to move beyond 58.

Based on this metric, the band between 60 and 62 appears to be where the currency is competitive against its trading partners.

Rupee on the charts

Another way to judge how far the rupee can rally or how low it can go is by studying historical rupee movements on the charts.

The Indian currency’s value has been slipping against the dollar for a very long time, over the past 50 years in fact. That the country has been continuously running a trade deficit since the 1950s is partly to blame for this.

One leg of this slide halted in May 2002 at 49 following which there was a period of strengthening till January 2008 when the rupee hit the peak of 39.

This period coincided with the opening up of the Indian economy and the inflow of foreign institutional investor money into Indian markets.

But with the 2008 crisis, the long-term down-move appears to have resumed in the rupee. A new leg of the structural downtrend is in motion since January 2008.

Long-term view

According to Elliott Wave Analysis, a double zigzag pattern could have been completed at last August’s low of 68.8.

If the entire move from the high of 39 is being corrected now, the rupee has a strong hurdle at 57.4. Surprisingly, that is the level that the RBI appears to be defending now.

A halt at this level will mean that the rupee could remain in the band between 57 and 70 for a few years as it consolidates. But such a move will keep open the possibility of a move below 70 over the long term.

The RBI has also made it clear that it does not want to ward off rupee depreciation. It is only volatile movements, with depreciation happening over a short period, which it wants to avoid.

If the rupee gets past the hurdle at 57, the next resistances are at 54 and then 52. We do not envisage a move above 52, even if copious inflows enter the country. The long-term targets on the lower side are between 70 and 75.

The medium term

The rupee is now close to the important medium-term hurdles at 58.2 and 57.4. These levels might not be surpassed just yet. But in the event of the currency moving beyond this level, it can head to 54. Reversal from current levels can see the rupee sliding till 62. That gives us the window that the RBI is talking about — between 57 and 62 — between which the rupee can move over the coming months.

If the rupee declines below 62, the next target would be 65.

Published on May 25, 2014 15:15