RBI signals it may not let rupee rise above 60 a dollar

MUMBAI: The Reserve Bank of India signalled it will not let the rupee appreciate beyond 60 to the dollar as it shifts to consumer prices as a basis for calculating the real effective exchange rate, or REER.
The central bank has released a new measure for REER based on the consumer price index, or CPI. REER is the inflation-adjusted value of the currency factoring in inflation differentials among trading partners.Until recently, REER, an indication of the skew in exchange rates, was calculated on wholesale prices. Using the new measure, an analysis by Yes Bank showed that at current levels, the rupee is very close to its fair value.
By that token, if the rupee strengthens further, the Reserve Bank could step in and buy dollars to stabilise the currency. “If inflation stays at current levels, then the exchange rate should stabilize at 60,” the report said. The rupee currently trades at 60.40-60 .80 levels. It ended at 60.43 to the dollar on Tuesday, strengthening 0.4% from Monday’s close.
“Amidst a clear mandate on elections and higher dollar inflows, fair value should improve further. However, in order to curb volatility, RBI is expected to allow the upturn only in a gradual fashion,” said Shubhada Rao, chief economist, Yes Bank.
Though the central bank does not officially refer to an equilibrium level for the rupee, it is understood to be tracking REER in its currency management and intervenes in the market to try and maintain it at close to that level. “REER based on consumer prices reflects a fair value of the rupee compared to that based on WPI,” said SK Ghosh, chief economic adviser, State Bank of India.
The possibilities of a stable government being formed after the election, further easing of CPI inflation and growth reviving could trigger some appreciation in the value of the rupee against the dollar toward the second half of 2014. However, the gains could be gradual. “In our view, RBI is likely to cap swift upside movements: beyond 59 levels in H1-2014 and beyond 58 levels in H2-2014,” said the Yes Bank report.