ET Intelligence Group: Late summer, the rupee seemed to be in a free fall as oil prices climbed to mid-80s in dollars per barrel. In less than eight weeks, the currency is on course to make a smart about turn, in lockstep with the retreating crude oil prices that have entered the ‘bear’ zone.
So, it is time for top global brokerages to get bullish on India – and its currency. UBS, for instance, said in a note that that the fair value of the rupee is in the range of 67-70, based on the productivity-adjusted Real Effective Exchange Rate (REER). If the current trend of lower oil lasts through March 2019, the currency could trade between 69 and 72 to a dollar, said UBS.
The REER is the weighted average of a country’s currency in a basket of other major money units, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances.
To be sure, UBS believes that a sustainable rupee appreciation is still some time away, given the general elections, MSCI EM rebalancing in the second or third quarter of 2019, and New Delhi’s basic balance deficit despite the plunge in global oil prices.
Every $10 per barrel fall in crude prices narrows India’s current account deficit by 0.5 per cent of the GDP and fiscal deficit by 0.1 per cent.
The rupee closed at 70.86 on Monday, and it has already climbed 3.7 per cent from the record lows reached in October. From the worst performing Asian monetary unit until a month ago, the rupee is now the second-best performer in the continent this month.
According to UBS, the six currency trade-weighted REER index has undershot its equilibrium value and dropped below one standard deviation. UBS believes that a marginal depreciation bias for the rupee could continue into FY20, although the currency is unlikely to reprise this calendar year’s weak performance.