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Rupee: Most Undervalued Among all Currencies

By SiliconIndia   |   Tuesday, 17 January 2012, 09:21 Hrs   |    10 Comments
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Rupee: Most Undervalued Currency Among all Currencies

Bangalore: The Economist's latest Big Mac Index has come up with a survey and declared Indian rupee to be the most undervalued currency. Currently rupee trades at around 61 percent below its actual price against dollar. 8 out of 10 Asian currencies are undervalued. The currency rating was done by analyzing how a particular good will carry different values in different countries. McDonald's popular burger was t he chosen one to evaluate the costs of the same burger in different countries. Through this the effective purchasing power of different currencies is measured.

Swiss Franc and the Norwegian Krone which had a currency index more than 60 percent were the two countries which were overvalued compared to the U.S. dollar. Further down were Sweden Brazil with over 40 and 30 percent overvaluation.

Indian Rupee has been hitting the ground for the last two years. Ukraine, Hong Kong and Malaysia are close at over 40 percent undervaluation. China's Yuan is the fifth most undervalued currency with over 40 percent overvalued with regard to U.S. dollar.

The last six months have witnessed 17 percent value depreciation of the rupee, which makes it more undervalued than Chinese Yuan, which is estimated to be standing at 41 percent. China has been under continuous pressure from U.S. to appreciate its currency and shift to a market-based exchange rate mechanism.

Big Mac has come up with a comparison between the prices of burger in the U.S., where it's currently sold for $4.20. But in India the Maharaja Mac is priced at 84. The exchange rate of 51.90 to a dollar costs a burger in India for $1.62. The purchasing power parity (PPP) comes out at 20 when we divide the local price i.e. 84 by the U.S. price, i.e. $4.20. The currency is overvalued or undervalued can easily be calculated through the difference between PPP and the exchange rate. Previously when Big Mac Index came up with this statistics, the Indian rupee was trading at around 44.40 percent to a dollar, and was undervalued by 53 percent.

However, cheap burgers cannot be the deciding factor to know if a currency is overvalued or undervalued. There are different factors which states why a currency is overvalued or undervalued such as government policies hinder normal equilibration of exchange rates. Also the labor costs come into picture which plays a vital role in different countries.

Ajit Ranade, Chief Economist at Aditya Birla Group tweeted, "Reversal inevitable." D K Joshi, Chief Economist at rating agency CRISIL added, "It is a proxy indicator and it does not signify much. But given our growth potential, capital inflows are expected to increase and there will be an appreciation bias." An appreciation is on bet by most of the foreign exchange dealers, but the situation in Europe is under a close watch. The slower growth rate and perception of policy paralysis has shied off many foreign investors from Indian stock market, FIIs has withdrawn around 3,800 crore from the share market.

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Reader's comments(10)
1: Burger is not a Gross Domestic Product in India. What is GDP, Who decides GDP of a country all these are big questions. Why we need to compare Rupee with Dollar, when America also imports basic needs, such as Crude. Following the old footsteps of the so called Economists needs to be revised.
Posted by:Sridhar - 17 Jan, 2012
man . They just took burger as an example .
caldwell Replied to: Sridhar - 19 Jan, 2012
3: Just compare what are all the things you can buy in India with Rupees one hundred and with usd 1.9 in USA and you will understand who is really stronger.In exchange the rupee is highly undervalued to bankrupt all our natural resources say raw materials to facilitate profits to few vedantas and Ambanis.In the so called market economy,this deliberation is just to keep the so the called Forex reserve kitty in tact just to show off as if it is our own assets.
If you see it from different angle the recent 22% rupee depreciation could be an arrangement by our UPA to facilitate the to be exposed Swiss money of corporate and politicians to find its way back to India with a 22% rupee bonus to invest in markets to further consolidate their stakes in their companies.
A wise Finance minister can bring down all inflation in a single day if he can either ban all derivatives in Share/commodities/currency markets or mandate 100% margin for F&O trading.
When no speculation, any country`s economy will react to the real Demand and Supply and its currency will have its real value for its worth.Let the wisdom prevail.JaiHind.Shyam.P.Kunte
Posted by:Shyam - 17 Jan, 2012
Our FM - belongs to Indira Gandhi's regime knows the same old route of devaluing the Rupee and to control the consumption of Petrol by hiking the rate..
Sridhar Replied to: Shyam - 17 Jan, 2012
5: There is a huge difference in the quality of McDonald's burger sold in the US, Europe or India. The quality of KFC/Camay soap/Lux soap/Laptops/Mobile instruments sold in the US/Europe and that sold in India vary drastically. Hence this comparison is baseless. One may compare gold price? Prices of petroleum products also vary because of factors like manufacturing costs/availability/import duty etc. Cheap labour also off sets the price.
Posted by:John K Chandy - 17 Jan, 2012
6: When the day will come that our currency will have higher values.. not the highest but atleast higher..
Posted by:Prantika - 17 Jan, 2012
As long as our policies don't change. Govt undervalues rupee for corporates to get more money on exports, for foreign institutions to invest at lower cost for them.

But undervaluing has a problem we need to give more money for export than required. Oil companies will say they're dying of subsidies still post 10K Crore profits. And we "ulloos" endup paying 100% tax on petrol, 40% on diesel and get $cr3wd in A55. Wondering where this country is going but cannot take voice as our time is spend on finding good life in 1.2bn and ever vehemently increasing population and decreasing resources.

End result rich become richer poor become poorer. And we have a colourful panel of middlemen elected by us who does nothing except point fingers, still gets rich!

RAAM Replied to: Prantika - 17 Jan, 2012
You are right. Actually we Indian are responsible for this. All the middle class of India is very busy watching Bollywood and cricket series all the year round not thinking of what is happening in our country.
Rajiv Replied to: RAAM - 17 Jan, 2012
I agree with your opinion. Its mainly because of our faulty financial management by our government, that his dip in rupee value is happening. Also most of the time they are never able to justify their new financial plans.
Wini Replied to: RAAM - 17 Jan, 2012
True Raam
John K Chandy Replied to: RAAM - 17 Jan, 2012