The external sustainability (ES) approach aims at calculating the difference between the actual CAD position and the balance that could stabilize the NFA position of the country at some benchmark level. 39. What if these three alternative estimates throw up different results? Take, for example, the IMF’s different estimates for India.
According to the Article IV Report released in February 2013, the macroeconomic balance approach suggested India’s real exchange rate to be undervalued by 3.5 to 4.5 per cent, the ERER approach suggests the rupee is overvalued by around 12 per cent, and the external sustainability approach pointed to the real exchange rate remaining broadly in line with its medium-term economic value.