London, UK, 4th Oct 2021, – FinancialCentre broker, Christian Ricci says that the Indian rupee depreciated 13 paise to 73.77 against the US dollar in opening trade on Friday,2021, but it was not alone as other Asian currencies also lost value relative to their American counterpart due to an increase of greenbacks outside these region’s borders. At interbank foreign exchange rates this morning (5/6), one could buy 31 rupees for 1 USD or get 35 yuan exchanged against every British Pound currently being offered at 29GBP per unit; while two weeks ago those figures were 27 and 32 respectively!
While analysts, pundits, and market watchers are offering multiple theories for this event (and others like it) which have been reoccurring since 2014; the International Monetary Fund (IMF) has very recently published its contribution to the debate. Its Foreign Exchange Rate Model (FERM) determined that there is “No preset fair value” for any currency in our world today.
The model’s estimates of equilibrium exchange rates can help identify misalignments from desirable levels and overshooting by a country’s exchange rate. In addition, the model can be used as a benchmark to assess potential economic adjustments including those related to nominal exchange rate policy options following a depreciation. But at present, there is no unique or correct answer to what a currency (one type of exchange rate) should be worth in terms of another currency. This is because there are different costs associated with holding money balances in different currencies.
There is more than one reason for this: one of them according to the IMF is that “a local unit of account and medium of exchange (money) can also perform non-monetary functions, such as serving as a store of value —similar to gold.” Another explanation provided by the Fund itself involves financial economics specifics like liquidity premiums and transaction costs which they say “depend on various factors such as distance from trading partners, trade barriers, settlement infrastructure, frequency and cost of market shocks, etc.”
The rupee settled at 73.64 against the US dollar in Thursday’s session, yet it still remains to be seen if this will have an impact on trade tensions between India and China. Meanwhile, however, as has been seen before when other currencies were weak due to them having disagreements with their trading partners over trade policy; we are seeing that even strong economies such as Canada can’t keep up because they depend heavily upon export markets which require consistent growth for financing their current account deficit (CAD).
The Bank of Canada lowered interest rates from 1% down 0.5%-1 percentage points last week but is worried about slowing down abroad so much less than expected. Its head, Stephen Poloz is quoted as saying that his institution “had to judge that the probability of a NAFTA deal continues to edge up”. Their dollar had earlier fallen on Thursday but it did get some support from stronger-than-expected jobs data.
Meanwhile, India’s central bank has not discounted the possibility of cutting rates too but has kept its own policy stance constant so far this year. The Reserve Bank of India feels it must support growth while not allowing for further weakening in the rupee. However presently our Rupee’s weakness likely won’t have an immediate effect upon Canadian exports because Indian demand for their products remains about where it was at this time last year according to Canada’s statistical agency.
The Indian equities market traded at a high on Wednesday, with both the Sensex and Nifty closing near record levels. Meanwhile, oil prices continued to hover above USD 77 per barrel despite an increase in production from OPEC member countries signaling that they are not ready for any major policy shift anytime soon
The benchmark thirty share index rose by 0.56% reaching 60k while highs were seen across all other markets as well-the broad-based National Stock Exchange (NSE) 40 list was up 0!%. In early deals, it touched 17 947 which beat previous records set back last year during the Demonetization period. Meanwhile, the rupee opened at 73.62 against the US dollar while the BSE Sensex was up 0.54%.
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