Indian rupee at fair value despite balance of payment problems: JPMorgan analyst

India’s balance of payments, a measure of how much the country relies on money from abroad, has been squeezed by a record trade deficit that has prompted economists to revisit their current account deficit and balance of payments (BoP)projections.

“India’s CAD (current account deficit) is tracking 4% of the GDP, historically a wide number. If left unchecked, this should reflect on the price of the rupee. But things are not left unchecked, and RBI has been managing the rupee,” Arindam Sandilya told Reuters in an interview.

“Taking a holistic view on India’s forex-relevant BoP position and the RBI, we reckon the fair value of the rupee is around 80.”

India’s foreign exchange reserves have declined to $570.7 billion from a record high of about $642 billion in September 2021 as the RBI has stepped in to bolster the rupee. Still, the local currency is down 7.5% in 2022, and on track for its worst annual performance in four years.

The rupee was trading at 79.85 per U.S. dollar on Monday, within a whisker of the record low of 80.0650 reached last month.

A rebound in inflows into Indian stocks in the past few days, with foreign investors turning buyers for the first time in nine months, has helped the rupee to an extent.

Sandilya reckons that JPMorgan’s fair value was near 81-82 at the beginning of the current quarter, but the surprising turnaround in equity flows has led it to reassess its fair value to near 80.

He said that rupee’s valuations remained “a little rich” relative other emerging market (EM) currencies and short rupee positions had potentially “have more runway”.

Shandilya pointed out that the market’s pricing of the U.S. Federal Reserve’s slightly dovish path next year is contrary to what policymakers have been saying recently.

On how much the oil’s recent pullback will help rupee, Sandilya pointed that when there is a demand-side fuelled drop in oil prices, emerging market currencies, including that of oil importing nations, weaken.