In addition to the Fed’s action, the Reserve Bank of India (RBI), under the stewardship of its new governor, Dr. Raghuram Rajan, raised its main policy rate (i.e., the reverse repo rate) in its September 20 policy meeting to combat inflationary pressures in India2. As a result, higher rates could further support the currency in the months ahead as investors seek higher carry abroad.
Relative Value in the Rupee Still?
The rupee has depreciated 40% against the U.S. dollar since early 2008, the most of any Asian currency3. To contrast this with one of its prime competitors, the Chinese yuan, the rupee reached all-time lows in 2013 whereas the yuan has continued to reach new all-time highs. In our view, the nearly 50% divergence between these two currencies could have a significant impact on trade, especially compared to China. Even though China’s currency does not freely-float in value against the U.S. dollar, the fact remains that the significant depreciation of the rupee makes India’s goods and service exports cheaper compared to China’s. Should inflation remain contained, a weaker currency could help the economy get back on track.