Fx USD INR 2000-2011 Analysis

Analysis and reference of The Economist's latest Big Mac Index report that INR is 61% undervalued. I am sure this will be of use for the readers and fraternity.

Source of base figures Reuters / RBI Central Bank of India

1.Post Liberalisation in 1991 till 2000 was an era of interest rate and policy related liberalization

2.Post 2000 onwards , as the reserves started building up and the banking and corporate balance sheets improved Fx related liberalisation started

3.Most relevant Fx data based on which one can look into future is 2000-2010 as the trade and opening of the economy has happened on trade front.

4.USD/INR parity has been between in 38% of the cases between 35 to 45 and 58 % of the parity between 45 and 50 thereby making the probability of 95% that the rupee should be below 50.

5.With Median of 45.69 the empirical and logical analysis suggests that the USD/INR should remain during the next couple of years between 45-47.

6.The movement of USD / INR can be considered volatile and also cyclical with range bound but over a period is a stronger currency and in coming decade, as there is no visibility of improving Euro and US zone economies for couple of more years and that Japan having almost 0% rates from 1991 onwards with almost negative growth, the unwinding of the carry trades in JPY and USD has resulted in even more comparative strength to INR and Yuan. JPY is now even less dependent on USD as the Dollar index again has been range bound between 70-80 during the period of falling US economy wherein in the early part of the last decade US started reducing rate and then abruptly increased the rates leading to huge treasury losses all across corporate, banks and investment banks.

Considering the Reports , views of Marc Faber (http://marcfaberchannel.blogspot.in/) , events in US and European deteriorating economies and thereby their currencies depreciating etc. Apart from this phenomenon, China and India are the most pottentially emerging markets for the rest of the world and are contributing to the world GDP growth considering the pottential of the economies to absorb necessity to luxury across all the product and quality segments.

Chinese currency is appreciating and a recent report that Indian Currency is Undervalued to an extent of 61% (attached) http://timesofindia.indiatimes.com/business/india-business/Worlds-most-undervalued-currency/articleshow/11519567.cms

World's most undervalued currency

Sidhartha, TNN | Jan 17, 2012, 06.07AM IST

NEW DELHI: The Indian rupee is the world's most undervalued currency, trading at around 61% below its 'actual' price against the dollar, The Economist's latest Big Mac Index has found. The index measures the effective purchasing power of different currencies by looking at how much McDonald's popular burger costs in various countries.

The rupee, which has depreciated around 17% against the dollar in the last six months, is even more undervalued than the Chinese yuan, which was estimated to be 41% undervalued. For long, the US has been mounting pressure on China to appreciate its currency and move to a market-based exchange rate mechanism.

The index compares the dollar price of the Big Mac in a country with the price of the burger in the US, where it currently sells for $4.20. In the case of India, the index uses the Maharaja Mac, which costs Rs 84, since the Big Mac is not sold here. Based on the January 12 exchange rate of Rs 51.90 to a dollar, the burger cost $1.62 in India. The purchasing power parity - which is the local price (Rs 84) divided by the price in the US ($4.20) - works out to 20. The difference between the PPP and the exchange rate will tell you whether a currency is overvalued or undervalued and by how much. In July 2011, when the last Big Mac Index was prepared and India was included for the first time, the rupee was trading around 44.40 to a dollar. It was then under-valued by 53%.

Although the index does provide the broad trend, cheap burgers do not necessarily mean that a currency is excessively undervalued or over-valued. Typically, in developing countries, the average price will tend to be lower than in developed markets as labour costs are lower.

"Reversal inevitable," tweeted Ajit Ranade, chief economist at Aditya Birla Group. "It is a proxy indicator and it does not signify much. But given our growth potential, capital inflows are expected to increase and there will be an appreciation bias," added D K Joshi, chief economist at ratings agency Crisil. Most foreign exchange dealers are also betting on an appreciation although the situation in Europe is something that they are watching very closely. Foreign investors are fighting shy of the Indian stock market, due to slower growth and perception of policy paralysis. In 2011, FIIs withdrew around Rs 3,800 crore from the share market. According to the latest index, the Swiss franc is the most over-valued (62%) currency, followed by the Swedish kroner (41%).