"Is the rupee fairly valued? This question is easier to ask rather than answer even at the best of times — and particularly so when the Indian currency is being hammered in the foreign exchange market. However, it still deserves attention since the exchange rate is the price that determines our economic interaction with the rest of the world.
There are at least three different ways in which to look at the value of the rupee. The first is the nominal exchange rate against the US dollar. This is the number that dominates the news these days. It is simply the relative price of the two currencies, or how many rupees it takes to buy one dollar. The usual rule is that the country with higher inflation needs to let its currency go down. The intuitive logic is quite simple: The external value of a currency has to move in tandem with its internal value. There are other factors such as productivity growth that matter as well, but the inflation differential is a good starting point."
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