"Rupee shifts from overvalued to undervalued, boosting export competitiveness"
NEER (Nominal Effective Exchange Rate)
weighted average of rupee's exchange rates against a basket of trading-partner currencies, unadjusted for inflation
REER (Real Effective Exchange Rate)
NEER adjusted for inflation differentials between India and trading partners; the true measure of currency competitiveness
The exchange rate of the Indian rupee has long been a barometer of India's macroeconomic health and external sector competitiveness. Since the shift to a market-determined exchange rate system in 1993, the rupee's value has been shaped by a combination of current account dynamics, capital flows, inflation differentials, and global commodity prices — particularly crude oil, which India imports in large volumes. The Reserve Bank of India (RBI) does not target a specific exchange rate but intervenes in foreign exchange markets to curb excessive volatility, a policy often described as a 'managed float.'
Historically, a persistent criticism of India's exchange rate management has been that the rupee was kept artificially strong — or allowed to depreciate more slowly than inflation differentials warranted — making Indian exports relatively expensive in global markets. This overvaluation, measured through the Real Effective Exchange Rate (REER), was a structural drag on India's manufacturing competitiveness, particularly vis-à-vis export powerhouses like China. The current episode of sharp rupee depreciation, driven by geopolitical energy shocks, has upended this long-standing concern.
The Nominal Effective Exchange Rate (NEER) measures the weighted average of the rupee's bilateral exchange rates against a basket of currencies of India's major trading partners, without adjusting for inflation. The Real Effective Exchange Rate (REER) goes a step further: it adjusts the NEER for inflation differentials between India and its trading partners. The RBI computes both indices using a 40-currency basket, with currency weights derived from each country's share in India's total foreign trade, and a base year of 2015-16 (index = 100). The 40 countries together account for roughly 88% of India's annual trade flows.
The interpretive logic is straightforward: if the REER is above 100, the rupee is overvalued in real terms — Indian goods are relatively more expensive abroad, hurting export competitiveness. …
Consider the following statements:
The effect of devaluation of a currency is that it necessarily
1.improves the competitiveness of the domestic exports in the foreign markets
2.increases the foreign value of domestic currency
3.improves the trade balance
Which of the above statements is/are correct?
Which one of the following is not the most likely measure the Government/Reserve Bank of India takes to stop the slide of Indian rupee?
Convertibility of rupee implies
With reference to India's Real Effective Exchange Rate (REER), consider the following statements:
1.The RBI computes REER using a basket of 40 currencies with 2015-16 as the base year.
2.A REER value above 100 indicates that the rupee is undervalued relative to the base period.
3.REER adjusts the Nominal Effective Exchange Rate (NEER) for inflation differentials between India and its trading partners.
4.Currency weights in the REER basket are derived from each country's share in India's total foreign trade.
Which of the statements given above are correct?
Which one of the following best explains why the Real Effective Exchange Rate (REER) is considered a more reliable measure of a currency's competitive value than the Nominal Effective Exchange Rate (NEER)?
Assertion (A): A country whose domestic inflation rate persistently exceeds that of its trading partners will see its Real Effective Exchange Rate (REER) rise even if its nominal exchange rate remains unchanged.
Reason (R): REER is computed by adjusting the Nominal Effective Exchange Rate for relative price levels between the home country and its trading partners.
The Real Broad Effective Exchange Rate (RBEER) computed by the Federal Reserve Bank of St. Louis differs from the RBI's REER primarily in which of the following ways?
1.RBEER uses a basket of 64 trade partners, compared to 40 in the RBI's REER.
2.RBEER uses 2020 as the base year, compared to 2015-16 in the RBI's REER.
3.RBEER measures only bilateral exchange rates against the US dollar.
Select the correct answer using the codes below:
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