India despite having a minuscule share in the world trade is part of BRIC, WTO and member of the nuclear club, but we are not yet part of big mac index. Big Mac index is based on the Principal of Purchasing Power Parity(PPP), it says exchange rate will move in a way that make the price of any goods identical across the countries. The logic is that if something is cheaper in one country compares to another, people will buy from first and sell to second till prices in both the countries are identical.
The big mac PPP is obtained by dividing the price of a Big Mac in one currency by its price in another currency. Then compared with the actual exchange rate; if it is lower then, the first currency is undervalued and if it is higher, then the first currency is overvalued. The latest index(in the 26 July magazine) of the Big Mac PPP for 32 countries confirms that most developing country currency excluding Turkey and Brazil, are undervalued. The index doesn't include the rupee why?
one of the reasons is that we don't have standard offering of the Mac Burger which contains beef as it is unacceptable in our country. But index is anyway rough guide to where global exchange should be, so we can look at McChicken Burger for exchange rate measurement. Taking nominal rupee-dollar exchange rate of Rs. 42 dollar, and McChicken Burger with cheese(Rs. 70), the index confirms that rupee is undervalued.
In fact rupee is more undervalued than the Chinese renminibi. According to the index Chinese currency is 49% undervalued against dollar while rupee is 53% undervalued. What it suggest is that we need not get so hyper each time the rupee appreciates since in reality it is hugely undervalued at present. Appreciation of currency bring in more in alignment with its PPP might help rein in prices. But RBI doesn't think so it say pass through of exchange rate is very minimal-less than .09%. But remember we import 70% of our crude oil requirements and though the government has not allowed a full pass-through higher oil prices(preferring instead to subsidise higher oil prices), there is no free lunch. The impact is felt through higher government borrowing to finance these subsidies. Logically therefore , an appreciation o the rupee should help. I think time has come to change our exchange rate policy.
