Comments on: Is the Indian rupee overvalued? http://www.eastasiaforum.org/2010/03/06/is-the-indian-rupee-overvalued/ Economics, Politics and Public Policy in East Asia and the Pacific Sun, 12 Feb 2012 19:28:35 +0000 hourly 1 http://wordpress.org/?v=3.2 By: Nikhileshhttp://www.eastasiaforum.org/2010/03/06/is-the-indian-rupee-overvalued/comment-page-1/#comment-101566 Nikhilesh Tue, 09 Mar 2010 03:02:17 +0000 http://www.eastasiaforum.org/?p=10410#comment-101566 I'm also slow with understanding the charts and implications drawn. From my limited knowledge, what matters under PPP ER theory is expected inflation rather than current inflation. While India's CPI-inflation is at a decade high right now, that is primarily due to a drought and poor management of food stocks. Provided there is a normal monsoon, CPI inflation will moderate dramatically in 2011. The CA deficit would also shrink, as the food trade balance improves and international prices for certain food imports are likely to moderate (Sugar prices have been heavily skewed by Indian growing conditions over the past 2 years). That being said, I really like pieces on this forum as they point out a bunch of interesting things I don't know about. Thanks for posting and having the courage to make a call on currencies. I’m also slow with understanding the charts and implications drawn. From my limited knowledge, what matters under PPP ER theory is expected inflation rather than current inflation. While India’s CPI-inflation is at a decade high right now, that is primarily due to a drought and poor management of food stocks. Provided there is a normal monsoon, CPI inflation will moderate dramatically in 2011. The CA deficit would also shrink, as the food trade balance improves and international prices for certain food imports are likely to moderate (Sugar prices have been heavily skewed by Indian growing conditions over the past 2 years).

That being said, I really like pieces on this forum as they point out a bunch of interesting things I don’t know about. Thanks for posting and having the courage to make a call on currencies.

]]> By: Lincoln Funghttp://www.eastasiaforum.org/2010/03/06/is-the-indian-rupee-overvalued/comment-page-1/#comment-101107 Lincoln Fung Sat, 06 Mar 2010 11:45:03 +0000 http://www.eastasiaforum.org/?p=10410#comment-101107 I'm even slower today and having difficulties in linking the two charts to form an idea what the authors are talking about. Secondly, I am not sure the concept is always sound that the exchange rate is in equilibrium at the time when the current account is balanced. While seemingly convincing, it would not be difficult for the existence of multi equilibrium (i.e. multi value) of the exchange rate if such a criterion is used. So there is at least a mechanism to reconcile such multi equilibrium. This is because there are so many factors that affect current account balance (e.g. a severe incident can cause a change current account balance), not to mention differential growths in productivity between countries and changes in consumer preferences between countries. A simple test, though not necessarily always sound by itself, would be how the current account balance changed in India since 2004-05? Do they correspond to the changes in the exchange rate, nominal or real? I’m even slower today and having difficulties in linking the two charts to form an idea what the authors are talking about.

Secondly, I am not sure the concept is always sound that the exchange rate is in equilibrium at the time when the current account is balanced.

While seemingly convincing, it would not be difficult for the existence of multi equilibrium (i.e. multi value) of the exchange rate if such a criterion is used. So there is at least a mechanism to reconcile such multi equilibrium.

This is because there are so many factors that affect current account balance (e.g. a severe incident can cause a change current account balance), not to mention differential growths in productivity between countries and changes in consumer preferences between countries.

A simple test, though not necessarily always sound by itself, would be how the current account balance changed in India since 2004-05? Do they correspond to the changes in the exchange rate, nominal or real?

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