The rupee appreciated 0.1% in September boosted by strong risk appetite following the US Federal Reserve’s outsized 50 bps rate cut.
However, the currency’s upside was limited due absorption of dollar inflows by the Reserve Bank of India.
The currency moved in a tight range in September from 83.8/$1 to 83.7/$1, as the RBI absorbed dollar inflows.
The RBIs foreign exchange reserves also reached a record high of $704.89 billion on September 27.
The stated position of the RBI is that it intervenes in the currency exchange market to cap excess volatility and does not target particular levels. The routine intervention by the RBI has caused overvaluation of the rupee compared currencies of its 40 trading partners.The rupee’s real effective exchange rate (REER) shows that the local currency was overvalued by 7.21% as of October 31, close to its highest level in nearly six years, RBI data showed.
REER is a measure of the currency’s competitiveness as against the 40 currencies.
Overvaluation of India’s currency adversely impacts the country’s exports by making them more expensive.
But “the sensitivity of India’s merchandise exports to real exchange rate changes seems to have come down over the years,” the RBI said in its monthly bulletin.
India’s merchandise exports grew by a compounded annual growth rate (CAGR) of 5.8% since April 2018, faster than the world’s average of 4%, the bulletin said.
