How much is the Rupee really worth? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 29 March 2014
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How much is the Rupee really worth? A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
There is no shortage of predictions about what the rupee will be trading at in the future. Recently, due to the expectation that the BJP will win the election and introduce pro market reforms, the rupee has performed extremely well. This has also led to predictions that USDINR will go to 58 or 56 as the election nears.

The problem with predictions about the future USDINR rate is that there is little fundamental basis to determine the true value of the rupee. When we value a stock, we can come up with an intrinsic value of the company. One such method of doing so is to discount the expected future cash flows of the company, and this determines what the value of the stock should be today.

When it comes to valuing a currency, we can't apply the same logic. Other than interest earned from holding a currency, there are no cash flows associated with investing in currencies. As a result, we can't discount future cash flows to come up with a fundamental value for the currency.

This means that it is not possible to claim that USDINR should be 58 rather than 56. We could just as easily say that USDINR should be worth 50, because there is no way to come up with the true value. The answer to the question of how much the rupee is really worth unfortunately doesn't exist.

When we trade currencies, instead of coming up with a fundamental value for USDINR, we instead try to predict the direction of change in the currency. Factors such as stock market performance, economic indicators, interest rates, global events, elections, etc. all move currencies. This means that it is much more plausible to claim that we expect USDINR to fall based on our forecast of the upcoming election.

This means that we should think of currencies solely in terms of their expected future movements. The fundamentals of the currency determine the changes, and nothing else. The actual level of the currency is not relevant. We can't talk of currencies as overvalued or undervalued, because the true value of the currency can't be determined in the first place.

In the Equitymaster club forum, we are opening discussion on the following topic based on this article: "How much is the Rupee really worth?"

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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4 Responses to "How much is the Rupee really worth?"

RAVI

Mar 30, 2014

The relative value of a currency depends to some extent on the balance of trade equations between Country A and B.

Like 

Shashidhar

Mar 30, 2014

It would be ideal if all the countries start their business transaction in a single currency. (very difficult but not impossible) .The IMF governed by representatives from all the countries can manage this currency. To begin with this global currency should only exist in digital form credit/debit/cash-cards.
That would mean no chance of counterfeit currency.
At least the unpredictable currency fluctuation is rid of or deliberate undervaluing of currency to push exports is taken care of.

Like (1)

sharad

Mar 30, 2014

Having ob served the Rupee Dollar exchange rate movement over last 20 years my feel is that if you run a regression between Rupee dollar exchange rate and inflation and net FII inflows yopu would be able to explain the movement to a great extent. FII inflows / outflows are determined by a large range of factors including perception of economy and other global cues. Ultimately, considering that Inflation has been within a range of 7-10% most of the time, it is the movement of FII flows that determine the fate of Indian Rupee (and also the stock market) to a great extent. Till our economy and stock markets are strong enough not to be swayed by the external influence we will continue to see volatility in our currency

Like (1)

C K Vaidya

Mar 30, 2014

I think the 'True Value' of a currency is what it can buy in the local market vis-a-vis other currencies. This is also the basis of 'purchase-price-parity'. On this basis, USD is worth some 10-15Rs.
A currency may never achieve its 'True Value' as it is determined by supply & demand vis-a-vis the other currency, mainly USD.
When economists are predicting that after the elections, USD will trade at Rs 56 or 58, they are factoring expected results of elections, policies formulated by the new govt, particularly those that affect twin deficits, the changes in global economies including continued taper in US as well as other likely disturbances such as Ukraine, China vs Japan....
No one is saying that Rupee 'SHOULD BE' or SHOULD TRADE AT' 56 or 58 to a USD. What economists are predicting is the likely level at which it will trade.

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