Don't be surprised if the rupee falls further

It has been widely noted in the past weeks that the rupee has declined against the dollar than many other currencies - as shown in Table 1.

Indeed, as Table 2 shows, since the National Democratic Alliance was elected a year ago, the rupee has depreciated noticeably.

As Table 3 shows, this decline is not as sharp as in 2013 but is no less noticeable. However, the truth could be that the rupee continues to be overvalued and should decline further.

That, at least, is the lesson of real effective exchange rate analysis, as shown in Table 4 - suggesting the rupee has been overvalued for the past year and the excess has steadily increased.

Part of that might be the capital account - a steady positive inflow of dollars, as shown in Table 5, though that has visibly crashed of late. The problem with the rupee's overvaluation is visible in Table 6: Export growth has been anaemic and declining in recent months. Fortunately , the current account deficit, shown in Table 7, is not a problem at the moment, thanks in large part to a concurrent decline in oil prices.

The Reserve Bank of India (RBI) has steadily been building reserves, as Table 8 shows, but not at a rate fast enough to prevent the rupee from being overvalued.