An expected US interest rate cut next month is unlikely to help the overvalued rupee even if its emerging market peers gain, bankers said.
The rupee was broadly stable on Monday after Federal Reserve Chairman Jerome Powell on Friday backed an imminent start of rate cuts.
The move is in line with the recent underperformance of the rupee as the currency has failed to benefit from the broader dollar decline.
The Indian currency has weakened slightly this month, despite a more than 3 percent drop in the dollar index.
Meanwhile, its peers, the Brazilian real, Thai baht, Indonesian rupiah and Malaysian ringgit, are all up around 5 percent.
The central bank of India, Reserve Bank of IndiaInvestors are likely to welcome the underperformance as the rupee’s real effective exchange rate (REER) – a measure of its competitiveness – rose to a near seven-year high last month.
The real exchange rate equivalent to 40 rupees stood at 107.3 in July, indicating that the rupee was overvalued by about 7 percent, according to the Reserve Bank of India’s latest monthly bulletin.
Overvaluation means that the Reserve Bank of India is likely to prevent a large appreciation in the rupee exchange rate.
“Despite the broad-based weakness of the dollar, the Reserve Bank of India has kept the currency stable. In our view, this provides an opportunity for the real exchange rate to decline,” Akshay Kumardirector of global markets at BNP Paribas India.
“From a policymaker’s perspective, the higher reading (of the real effective exchange rate) would be a risk to India’s export competitiveness,” said a private lender. HDFC The bank indicated this in a note.
India’s merchandise trade deficit hit a nine-month high in July, weighed down by sluggish exports.
The rupee has fallen 0.7 percent this year and was trading at 83.88 per US dollar at 14:00 IST.
There is “little chance” of the rupee rising above 83.50, said a senior trader at a public sector bank.
He Reserve Bank of India He had bought dollars near that level in July and would likely do so again, he said.
Analysts have maintained their negative outlook on the rupee even as bullish bets on most Asian currencies increased in August, according to a Reuters poll.
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