Rupee is only marginally overvalued: Nomura

Indian rupee’s recent outperformance on a real effective exchange rate (REER) basis amid weak exports has led to concerns that the currency is overvalued. However, Nomura said that rupee is only marginally overvalued, REER strength is explained by productivity growth and export weakness can be explained by factors other than REER strength.

India’s external vulnerability metrics have improved since 2013, as the RBI has accumulated a sufficient buffer against potential capital outflows. Nomura expect the RBI to be less interventionist in the medium term, with an increased focus on maintaining monetary policy autonomy and minimising costs.

The brokerage house forecast spot rupee against dollar at 63.20 in Q3 2016 (a total return of 8.2%) based on the cyclical recovery, a narrower current account deficit that is more easily financed, increased monetary policy credibility and the prospect of less dollar buying intervention from the RBI. Forex intervention has important implications for banking system liquidity and rates markets.

India is recognized as a positive medium-term story, India rupee to gradually depreciate until end-2016. This view is driven by expectations of dollar strength and the belief that the Reserve Bank of India (RBI) will continue to intervene aggressively in the forex market. These expectations, when combined with a world of beggar-thy-neighbour policies, concerns over rupee overvaluation and its impact on India’s export competitiveness, have resulted in a broad view that the RBI has a preference for a weaker rupee.