Despite touching 60, rupee still 17.6% overvalued: Nomura
Mumbai: Though the rupee has dropped sharply over the last few weeks and breached the level of 60 to the dollar, brokerage firm Nomura believes the Indian unit is still overvalued by a whopping 17.6 percent.
"Many may think the recent under-performance of the rupee, which has depreciated by around 9 percent against the dollar since May 22, has brought the rupee closer to fair value, but our forex valuation analysis shows the rupee is still about 17.6 percent overvalued," Nomura India said in a report Thursday.
The Japanese brokerage noted that the Reserve Bank has lesser space to intervene to stem the rupee fall.
"Worsening of external vulnerability indicators suggest that the RBI's hands are largely tied. We doubt whether RBI can continue to intervene aggressively, as the more it intervenes, the greater the vulnerability to further capital outflows."
On Wednesday, the rupee hit a lifetime low of 60.72 against the US currency. However, it pulled back from the lows to close at 60.19 today on the back of a sharp fall in current account deficit (CAD) in the fourth quarter of last fiscal.
Nomura, however, said both the Government and RBI are likely to announce various reform measures and impose curbs on importers and exporters to prevent further fall in the rupee.
"Some real sector reforms that we think are possible include clarity on gas pricing and measures to attract greater capital inflows such as raising FDI caps in select sectors and relaxing external commercial borrowing limits further.
"Moreover, pending legislative reforms like land acquisition and Companies Bill could be taken up during the forthcoming monsoon session of Parliament," the report said.
Financing CAD would be a big challenge, it said. "Even as we expect India's current account deficit to moderate to 4.3 percent of GDP in FY14 due to lower gold imports, we expect financing the deficit this year will be a big challenge," the report said.
A weak rupee will increase inflation and make imports costlier. "Further, domestic supply-side constraints, weak global demand and inelastic imports mean the trade deficit is unlikely to improve substantially even with a weak currency."
The rupee fall would delay rate cuts and force the central bank to keep liquidity tight, it said.