Representative image showing Indian rupees.
Credit: Pixabay Photo
Mumbai: An expected US interest rate cut next month is unlikely to help the overvalued rupee, even as its emerging market peers gain, bankers said.
The rupee was nearly flat on Monday after Federal Reserve Chair Jerome Powell on Friday endorsed an imminent start to rate cuts.
The move was in line with the rupee's recent underperformance as the currency has failed to gain from the dollar's broad slump.
The Indian currency has weakened slightly this month, despite a more than 3 per cent drop in the dollar index.
Meanwhile, peers Brazilian real, Thai baht, Indonesian rupiah and Malaysian ringgit have climbed about 5 per cent.
India's central bank will likely welcome the underperformance as the rupee's real effective exchange rate (REER) - a measure of its competitiveness - rose to a near 7-year high last month.
The rupee's 40-currency REER was at 107.3 in July, signaling that the rupee was overvalued by about 7 per cent, according to the Reserve Bank of India's latest monthly bulletin.
The overvaluation means the Reserve Bank of India will likely prevent a large appreciation in the rupee's exchange rate.
"Despite broader USD weakness, the Reserve Bank of India has been keeping the currency stable. In our view, this provides an opportunity for the REER to come down," Akshay Kumar, head of global markets at BNP Paribas India, said.
"From a policymaker's perspective, the higher (REER) reading would be a risk to India's export competitiveness," private lender HDFC Bank said in a note.
India's merchandise trade deficit jumped to a 9-month peak in July, hit by sluggish exports.
The rupee has declined 0.7 per cent this year and was quoted at 83.88 to the US dollar at 2:00 pm IST.
There is "little chance" of the rupee rising past 83.50, a senior trader at a public sector bank said.
The RBI had bought dollars near that level in July and was likely to do so again, he said.
Analysts have retained their negative outlook on the rupee even as bullish bets on most Asian currencies rose in August, according to a Reuters poll.