Expectations of Fed rate cuts drive emerging markets rebound, with the Indian Rupee feared to be the only absent currency
Bankers say that the expected interest rate cut in the United States next month is not likely to help the overvalued Indian Rupee, despite the appreciation of other emerging market currencies. According to reports, the Rupee has performed poorly recently and has not benefited from the decline in the US Dollar. Meanwhile, currencies such as the Brazilian Real and the Thai Baht have appreciated by about 5%. The Reserve Bank of India may prefer to see the Rupee maintained at a relatively high real effective exchange rate level to protect export competitiveness. Analysts hold a negative view on the Rupee, although they are optimistic about the prospects of other Asian currencies
According to the Wisdom Financial APP, bankers believe that the expectation of a rate cut in the United States next month is unlikely to help the overvalued Indian Rupee, despite the appreciation of emerging market currencies.
After Federal Reserve Chairman Powell announced last Friday that rate cuts are imminent, the Rupee remained almost unchanged on Monday. This move is in line with the recent poor performance of the Rupee, as it has failed to benefit from the overall decline of the US Dollar.
Despite the US Dollar Index falling by over 3%, the Indian currency has weakened slightly this month.
Meanwhile, currencies such as the Brazilian Real, Thai Baht, Indonesian Rupiah, and Malaysian Ringgit have appreciated by about 5%.
The Reserve Bank of India may welcome the poor performance of the Rupee, as the Real Effective Exchange Rate (REER) of the Rupee - a measure of its competitiveness - reached a near 7-year high last month.
The latest monthly report from the Reserve Bank of India shows that in July, the REER of the Rupee against 40 currencies was 107.3, indicating that the Rupee is overvalued by about 7%.
An overvalued currency implies that the Reserve Bank of India may prevent a significant appreciation of the Rupee.
Akshay Kumar, Head of India Global Markets at BNP Paribas, said, "Despite the general weakness of the US Dollar, the Reserve Bank of India has been maintaining currency stability. In our view, this provides an opportunity for the decline of the REER."
In a report, the private bank HDFC Bank stated, "From the perspective of policymakers, higher REER readings pose a risk to India's export competitiveness."
Due to the impact of sluggish exports, India's merchandise trade deficit in July surged to the highest level in 9 months.
A senior trader at a public sector bank stated that the likelihood of the USD/INR exchange rate breaking 83.50 Rupees is "very low."
He mentioned that the Reserve Bank of India had bought US Dollars near this level in July and is likely to do so again.
Surveys show that analysts still hold a negative view on the Rupee, despite increased bullish bets on most Asian currencies in August.
