It is a good thing if the rupee depreciates to 65.0-65.50 to the US dollar, as our currency is still over valued in REER (real effective exchange rate) terms, says Ananth Narayan, Head, Financial Markets, Standard Chartered Bank.
"The reality is India is the most over valued currency over the last two years," he tells CNBC-TV18.
"Earlier, China was leading the pack. Now that China has moved, India stands out as a sore thumb as the most over valued currency among all major currencies," he says. The weakening of the yuan has both positive and negative implications for India, he says.
"Clearly, commodity prices being low is great news for us at the macro level; at the same time, while exports won't be impacted directly, domestic industry is going to be hit," he says, highlighting tyre and steel as the sectors which could be hit the most.
On China's decision to depreciate its currency, Narayan says it is both an attempt to revive the economy as well as correct the discrepancy in the yuan value.
"With the IMF SDR (special drawing rights) report , there was a requirement for China to move to a more market determined rate.
In the past, they have been accused of a fairly blackbox approach to fixing the FX rate, and what they have done is to alleviate some of those concerns.
Through this, they have achieved a few other positive benefits. Their REER was over valued over the last couple of years, their exports are down sharply, and they have lost around USD 350 billion of reserves over the last one year because of capital outflows," he says.
"They still have USD 3.65 trillion worth of dollar reserves, and they can come into the spot market at any point of time to control the volatility there. I think around 6.5 on the yuan, you will see Chinese authorities stepping in and arresting any sharp fall," he says.
For teh rupee as well, Narayan says a steep fall is unlikely because capital flows are fairly robust. "We are seeing knee jerk reactions. It would be great to see some depreciation in the rupee," he says.
"Reality is we are overvalued in REER terms, and also there is an overhang of unhedged foreign currency exposure. I think it is a great time for importers an dpeople with unhedged exposures to buy some insurance given that the paradigm is changing," adding that it is "great news" if these factors pull the rupee down to 65-65.5 to the dollar.
Source:moneycontrol.com
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