NEW DELHI: The rupee at the current level is "well corrected" and it will gain further with stability

returning to the forex market, Prime Minister's Economic Advisory Council Chairman C Rangarajan today said, amidst volatility in the exchange value of the local currency. The rupee has recovered to trade at 63 level after hitting its life-time low of 68.85 towards August-end. "The rupee at the current level is well corrected. Stability is returning to the foreign exchange market. As capital flows return and as CAD begins to fall, this tendency will strengthen," Rangarajan said while releasing Economic Outlook for 2013-14. "Ultimately the value of rupee depends upon the level of the current account deficit, the level of capital flows and what is happening in the rest of the world. Therefore, it is a combination of the factors that ultimately that impact the value of rupee," he said. The domestic currency jumped 425 paise in five straight sessions starting September 7 on optimism sparked by steps announced by RBI Governor Raghuram Rajan, who took over on September 4, to rescue the battered financial markets. Asked about the impact of likely tapering of quantitative easing, if announced, by Fed next week, Rangarajan said, "I believe that foreign exchange markets have already digested it. All the impact we have seen is in terms of what the Fed will do." Stating that there is no unique way for determining what the appropriate value of the rupee, he said many steps have been taken recently in order to stabilise the rupee and allay the fears of investors and to restore the confidence in the economy. The rupee was fairly stable around 54-55 to a dollar between August 2012 and May 2013, and fell sharply to around 61 in two months. Though the fall reflected a general depreciation of emergingmarket currencies, it has sparked a debate on what the equilibrium value of the rupee is. Some commentaries arguing for further depreciation are based on the "inflation differential". While the nominal rupee should depreciate to maintain competitiveness if Indian inflation is higher than that of its trading partners, the need to depreciate is lower if Indian productivity growth is higher than that of its trading partners. Correcting for the effects of productivity, we find that the rupee is not significantly overvalued today. Competitiveness is only one of the factors determining the current account deficit (CAD). Things like a ban on iron ore output leading to lower exports and higher imports and rigidities in coal output explain much of the high CAD. So does the demand for gold. Now, if large imports like oil are relatively inelastic to depreciation and if there is a rising imported intermediate content of exports, then rupee depreciation is unlikely to squeeze the CAD. In that case,

the exchange rate will be determined by financial market perceptions. Given that incorrect expectations may become self-fulfilling, relyingon the market to get it right, or to not overshoot, may not be right. The real effective exchange rate (REER) - a weighted average of our currency relative to our trading partners' currencies, adjusted for inflation - is a common measure of the alignment of a currency to its true value. As, the RBI's measure of REER uses the wholesale price index (WPI) for India and consumer price index (CPI) for trading partners, we re-estimated the REER using CPI for India as well, with 2005 as the base year. Our estimate of REER was at an average of 111.4 in July. This means that despite the recent depreciation, the rupee was 11.4% higher than its fair value in July. Based on this, observers say the rupee needs to correct more. But this ignores the fact that the rise in REER might reflect an improvement in productivity vis-a-vis trading partners and, thus, a long-term movement in the equilibrium exchange rate. So, since the equilibrium exchange rate itself is likely to have gone up owing to productivity changes, at the very least, the degree of overvaluation or deviation from the new equilibrium ought to be lower than 11.4%. So, we need to adjust for the productivity differentials when measuring the competitive nominal exchange rate. This was first pointed out by economists Bela Balassa and Paul Samuelson, in the context of developing nations. As poor countries grow and their productivity improves, an appreciating real exchange rate is common. If India's productivity and thus the wages in the IT services or garment exports rise, then the price of haircuts that are non-tradable services, where there has not been a comparable rise in productivity, will also rise, leading to an economywide rise in prices.This does not mean the country is uncompetitive in the export sector;in fact, quite the contrary. We worked out the equilibrium value for REER during 2005-12, assuming the currency was fairly valued in 2005. Based on data from the World Development Indicators of the World Bank, India's percapita dollar GDP in PPP terms increased by around 37% relative to a weighted average of the top six trading partners during 2005-12. Based on that, the equilibrium value for 2012 works out to be 112. Thus, the REER average for July 2013, at around 111.4, implies that REER for India was close to its long-term equilibrium value in July 2013. However, with the rupee around 65-66 to a dollar, it has overshot its equilibrium value andis undervalued at current levels. So, after taking into account productivity, wage and price increases in India, we find that the rupee

has currently fallen more than it should have against the dollar. The nominal rupee at July 2013 levels was closer to what it ought to be. That is also the conclusion of a new IMF assessment of the economy's external balances. As India's economic boom disintegrates and the country stumbles through multiple challenges, the fall of the rupee versus the US dollar - an astounding 20 per cent from the beginning of the year - has caused the most consternation. The impact can be severe - higher fuel costs, rising prices of goods, rising interest rates, higher import costs, rising inflation, etc. What has led to this downfall? Is the global economic slowdown at fault? Or is it the handling of the situation by India's powers-that-be? Or is it both? Delhi-based research agency Marketing & Development Research Associates (MDRA) undertook a survey of more than 8,000 citizens to find what the people of India think. The survey was carried out in 29 states and Union Territories, across age groups, education levels, gender and occupation profiles, etc. RESULT Q. The fall in the rupee's value against the US dollar is because of 1. Global economic slowdown: 19.9 per cent 2. Incompetence of Indian authorities: 39.3 per cent 3. Both: 40.7 per cent