The Indian Rupee Exchange Rate Complex (Currency:INR) is said to be overvalued based on historical standards report analysts at Bank of America Merrill Lynch.
Those holding out for higher pound to Rupee rates will be disappointed that near-term trade has seen the Indian currency move higher.
Driving gains are the ruling party's success in two state elections and the removal of diesel subsidies. Further reforms include a hike in natural gas prices; both of which have encouraged investors that the Indian economy is under-taking much-needed structural reforms.
Latest Rupee exchange rates for reference
- The pound to Indian rupee exchange rate (GBP/INR): 1 GBP = 98.6288 INR
- The euro to Indian rupee exchange rate (EUR/INR): 1 EUR = 77.9645 INR
- The US dollar to Indian rupee rate (USD/INR): 1 USD = 61.1850 INR
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While the rupee complex has risen short-term it will be interesting, for those who can wait, that further declines in Indian exchange rates are on the cards.
Bank of America warn of an overvalued currency
In a note to clients, analyst Claudio Piron at Bank of America Merrill Lynch tells us:
- The INR has come under pressure since June, so much so that the INR has been the second worst-performing currency in Emerging Asia. In spite of this, INR remains overvalued in REER terms.
- We expect the Reserve Bank of India will use foreign inflow to continue to purchase dollars on INR upswings.
- Despite nominally weakening 11% in spot terms and 9% in trade weighted terms since the end of 2012, the INR remains overvalued in real terms. This has become apparent in the new CPI-based real effective exchange rate (REER) series introduced by the RBI in April 2014, which shows the REER has appreciated 2% since the end of 2012.
- On effective exchange rates, we believe the prolonged weakness in INR would prevent a significant rise in NEER over the short term. Additionally, falling inflation should reduce the gap between domestic and (weighted) trade partner inflation, thereby narrowing REER overvaluation
- INR has depreciated roughly 3.8% since June and it seems there is still more to go. Equity flows have all but dried up while inflows into debt have continued.
- Positioning also remains heavy in INR. Long INR was the favorite trade of all EM investors.
- As a result, INR could remain under pressure in the short term as positions are unwound. However, we still like INR in the medium term. Reforms will likely continue to take shape and the RBIโs credibility is greater than before.
- We have expressed our bullish view on INR through long INRJPY. We are in this trade for the medium term. So, in spite of this trade getting hurt in the recent risk-off, we hold onto it.
- We extend the stop to 1.67 from 1.715.
