Rupee is world's most undervalued currency: Big Mac Index
17 JAN, 2012, 06.53AM IST, SIDHARTHA,TNN
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NEW DELHI: The Indian rupee is the world's most undervalued currency, trading at around 61% below its 'actual' price against the dollar, The Economist's latest Big Mac Index has found. The index measures the effective purchasing power of different currencies by looking at how much McDonald's popular burger costs in various countries.
The rupee, which has depreciated around 17% against the dollar in the last six months, is even more undervalued than the Chinese yuan, which was estimated to be 41% undervalued. For long, the US has been mounting pressure on China to appreciate its currency and move to a market-based exchange rate mechanism.
The index compares the dollar price of the Big Mac in a country with the price of the burger in the US, where it currently sells for $4.20. In the case of India, the index uses the Maharaja Mac, which costs Rs 84, since the Big Mac is not sold here. Based on the January 12 exchange rate of Rs 51.90 to a dollar, the burger cost $1.62 in India. The purchasing power parity - which is the local price (Rs 84) divided by the price in the US ($4.20) - works out to 20. The difference between the PPP and the exchange rate will tell you whether a currency is overvalued or undervalued and by how much. In July 2011, when the last Big Mac Index was prepared and India was included for the first time, the rupee was trading around 44.40 to a dollar. It was then under-valued by 53%.
Although the index does provide the broad trend, cheap burgers do not necessarily mean that a currency is excessively undervalued or over-valued. Typically, in developing countries, the average price will tend to be lower than in developed markets as labour costs are lower.
"Reversal inevitable," tweeted Ajit Ranade, chief economist at Aditya Birla Group. "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," added D K Joshi, chief economist at ratings agency Crisil. Most foreign exchange dealers are also betting on an appreciation although the situation in Europe is something that they are watching very closely. Foreign investors are fighting shy of the Indian stock market, due to slower growth and perception of policy paralysis. In 2011, FIIs withdrew around Rs 3,800 crore from the share market. According to the latest index, the Swiss franc is the most over-valued (62%) currency, followed by the Swedish kroner (41%).
The rupee, which has depreciated around 17% against the dollar in the last six months, is even more undervalued than the Chinese yuan, which was estimated to be 41% undervalued. For long, the US has been mounting pressure on China to appreciate its currency and move to a market-based exchange rate mechanism.
The index compares the dollar price of the Big Mac in a country with the price of the burger in the US, where it currently sells for $4.20. In the case of India, the index uses the Maharaja Mac, which costs Rs 84, since the Big Mac is not sold here. Based on the January 12 exchange rate of Rs 51.90 to a dollar, the burger cost $1.62 in India. The purchasing power parity - which is the local price (Rs 84) divided by the price in the US ($4.20) - works out to 20. The difference between the PPP and the exchange rate will tell you whether a currency is overvalued or undervalued and by how much. In July 2011, when the last Big Mac Index was prepared and India was included for the first time, the rupee was trading around 44.40 to a dollar. It was then under-valued by 53%.
Although the index does provide the broad trend, cheap burgers do not necessarily mean that a currency is excessively undervalued or over-valued. Typically, in developing countries, the average price will tend to be lower than in developed markets as labour costs are lower.
"Reversal inevitable," tweeted Ajit Ranade, chief economist at Aditya Birla Group. "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," added D K Joshi, chief economist at ratings agency Crisil. Most foreign exchange dealers are also betting on an appreciation although the situation in Europe is something that they are watching very closely. Foreign investors are fighting shy of the Indian stock market, due to slower growth and perception of policy paralysis. In 2011, FIIs withdrew around Rs 3,800 crore from the share market. According to the latest index, the Swiss franc is the most over-valued (62%) currency, followed by the Swedish kroner (41%).
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