The Rupee, Its Valuation and the Missing Trade Surpluses

The rupee is one of the most undervalued currencies in the world. According to the International Monetary Fund (IMF), if you were to take a basket of goods bought in India, the exchange rate that would make that basket equivalent in price in India and abroad is Rs 18.5 per dollar. This makes the rupee more than 60% undervalued. The only currencies as undervalued as the rupee today, on this purchasing power parity (PPP) basis, are the Russian rouble and the Ukrainian hryvnia. Both are special cases. The hryvnia collapsed to a third of its previous value after territorial losses to Russian-supported separatists. The rouble lost 50% of its value over the same period following inter­national sanctions in response to its actions in Ukraine, and collapsing prices of energy. Energy accounted for 68% of Russian export revenues prior to last year’s slide in the oil price.

It is significant that despite this substantial undervaluation, India is not running an equally substantial trade surplus. According to the Reserve Bank of India, the trade deficit for 2013–14 was $136.1 bn. The rupee has been on a steady weakening trend since July 2011 and not all of its weakness has yet been reflected in international trade. However, back in 2010–11 when the rupee was around 44 to the dollar, still over 60% undervalued against the IMF’s then PPP rate of Rs 15.5 to the dollar, the country was running a trade deficit of $118.7 bn. India runs endemic trade deficits when the steep undervaluation of its currency should be generating rampant surpluses.