The rupee, which fell 37p to close at 62.60 against a dollar on Monday, is definitely undervalued, said Economic Affairs Secretary Arvind Mayaram.
"The intrinsic value of the rupee comes from its purchasing power. The intrinsic value in Real Effective Exchange Rate (REER) terms could be somewhere between 58 and 60 (to the dollar)," he said on the sidelines of a function organised by the Federation of Indian Chambers of Commerce and Industry.
The rupee had touched an all-time low of 68.86 to a dollar last month. This is what is termed the nominal effective exchange rate (NEER). REER is arrived at when inflation or purchasing power parity is factored in.
There are a host of reasons for the rupee to fall against the dollar, such as dwindling capital flows or a higher import bill. Mayaram said a fall in bulk diesel demand this financial year would save the government about $1 billion. Diesel accounts for a little over 40 per cent of fuel consumption in India. India's crude oil import in 2012-13 was $144 billion.
To rationalise fuel prices and bring down underrecoveries of the three (government-owned) oil marketing companies, the government had earlier this year allowed the latter to charge market rates from bulk users of diesel. Retail customers, however, continue to get diesel at subsidised rates.
Mayaram said he expected foreign direct investment (FDI) flows of about $36 billion this year if the current trend continued. Net FDI inflows declined 38 per cent to $22.4 billion in 2012-13 against $35.1 billion the previous year.
The country's foreign exchange reserves are $270 billion, he said, and if the current trend continued, there would be about $40 billion of additional inflow of capital. Net capital inflow was $88.9 billion in 2012-13. These are needed to finance the current account deficit (CAD), expected to be $70 billion this financial year. The finance ministry has said it was sure this could be done without drawing down the forex reserves. However, the Prime Minister's Economic Advisory Council had stated there would be a need for $8.6 billion from the forex reserves to finance the CAD.
As for the US Federal Reserve's decision last week to postpone tapering of its quantitative easing programme, Mayaram said: "I do believe when tapering happens there will be outflow of capital but we have enough ammunition in our hand... there is no room to be fearful of the rupee taking a tanking."
By the time the Fed begins tapering its monthly $85-billion bond buying, said finance ministry officials, India's economy would be in better shape.
On growth, Mayaram said, "We are not satisfied with a five per cent (annual) growth rate. India's potential rate of growth is eight per cent. In the next two years, India will again start growing by eight per cent (yearly)." Economic growth in the April-June quarter fell to a four-year low of 4.4 per cent. In 2012-13, the economy grew at a decade low of five per cent.