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Rupee at 90: Crisis or Economy's Crucial Adjustment?
3 Dec
Summary
- The Indian rupee has fallen to 90 against the US dollar.
- Currency movements are complex, not easily defined as 'good' or 'bad'.
- Real Effective Exchange Rate (REER) indicates if a currency is overvalued or undervalued.
The recent fall of the Indian rupee to 90 against the US dollar has triggered immediate concerns of an economic crisis. However, a deeper analysis reveals that currency fluctuations are complex, defying simple 'good' or 'bad' labels. This adjustment at the 90 mark may be a necessary response to broader economic challenges the country is facing.
While the US Dollar Index saw a 6% decline over the past year, not all currencies appreciated as theoretically expected. The rupee, along with the Indonesian rupiah, South Korean won, and Vietnamese dong, depreciated by 6%. In contrast, currencies such as the Chinese yuan and Brazilian real showed appreciation, highlighting divergent economic performances.
To truly gauge a currency's health, nominal exchange rates are insufficient. The Real Effective Exchange Rate (REER) provides a more accurate picture by adjusting for inflation and trade. A REER above 100 suggests a currency is overvalued, while a value below 100 indicates it is undervalued relative to economic fundamentals.
