Can Rupee REER fall with Nifty PE?

Can Rupee REER fall with Nifty PE?

Apr, 05, 2018     By Saandhy Ganeriwala    0 comments



Rupee REER and Nifty PE have fallen We asked the above question in Dec ’17. The chart of Rupee Real Effective Exchange Rate (REER) and Nifty PE evolved since then, as below: Rupee REER and Nifty PE have peakedNifty PE had reached 26.6, which was near the peak last seen in the 2007 market top. Hence, we were unable to be bullish on Nifty PE any more. Moreover, the strong correlation between Rupee REER and Nifty PE (especially seen to be strong near peaks) meant that we were expecting Rupee REER (122.57 in Dec ’17) to be dragged lower with Nifty PE in 2018. Rupee REER and Nifty PE have fallenOur view was proven correct. Nifty PE has seen a rather steep fall to 25.68 (Feb ’18) and 24.66 (Mar ’18). Along with it, Rupee REER has indeed been dragged lower from 122.57 in Dec ’17 to 119.51 in Feb ’18.   Rupee REER vs USDINRThe REER of Rupee tells us how much the market rate for Rupee deviates from its fair value. An REER value above 100 implies that the market rate is overvaluing the Rupee, while a value below 100 indicates undervaluation. Hence, a fall in REER implies that the Rupee’s overvaluation has decreased ie the Rupee has weakened. The green zones in the adjacent chart highlight the close correlation between Rupee REER and USDINR (inverse). After a phase of divergence between 2014 and 2016*, the correlation has returned. *This suggests that the Rupee did not weaken as much as it should have during 2014-16.   Indicative projections for REER NiftyPE and USDINRIn the adjacent table, we make indicative projections for REER, Nifty PE and USDINR on the basis of past examples, when steep falls in Nifty PE led to a drop in Rupee REER and a rise in USDINR. We project that if Nifty PE falls to 22 by Dec ’18, we could see USDINR rise to 67.   You can view our Economic Calendar with the current chart here.

Saandhy Ganeriwala

Saandhy is a postgraduate in Economics, but like all good market-men, he seeks confirmation from technical analysis charts for his macroeconomic ideas. His research is a good mix of charts, stats and econ. Apart from that, he calls himself a news junkie and an occasional writer.


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