The rupee is down more than 3% against the USD since June, hovering within the 61.80-62 range after briefly testing past the latter last week. While the rupee bilateral rate signals a slight depreciating bias, the real effective exchange rate (REER) is pointing the other way, according to DBS Bank, India.
''On inflation-adjusted REER basis, the rupee has in fact appreciated more than 2% since June. Plainly put, even though rupee is weak against the dollar, it is trading on a firm note against the currencies of its key trading partners ,'' it added.
''This divergence in the currency movements can be partly explained by composition of the effective exchange index, as the impact of the strong USD is offset by the weak Euro and JPY. With the central banks in the latter two expected to keep their feet on the stimulus pedal, downside pressure on their respective currencies could sustain and keep the rupee firm on comparative basis,'' said DBS Bank.
Thereby, to compensate for the currency's strength on real basis, build foreign reserves stock and ensure trade competitiveness, the Reserve Bank of India (RBI) is likely to keep the rupee on a tight leash. Intervention data also points to the central bank's active presence in supporting the USDINR. After turning as a net seller in Aug, RBI bought net USD 1.4 billion in spot and USD 8.4 billion in the forwards market in Sep. This likely lasted into Oct and Nov to offset broad USD strength.
''Despite the recent bout of rupee weakness against the dollar, the unit is still amongst the strong performers in the region. The economy's current account deficit is likely to stay below -2% of GDP this year, well within RBI's comfort level of -2.5%. On the other hand, strong portfolio inflows (equity and debt) and recovery in FDI flows will buttress the capital account and be more than sufficient to fund the current account gap, boosting the balance of payments position,'' it said.
''In sum, the economy's improving macro fundamentals, buoyant sentiments and FX reserves stock will help shied the currency from any intermittent bouts of risk aversion. But any unexpected flare-up in global risk factors could put the India's resilience at test.''
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