The economists refer to as the real effective exchange rate or REER. It is a
measure of the trade-weighted average exchange rate of the rupee
against a basket of currencies after adjusting for inflation
differentials vis-à-vis the countries concerned and expressed as an
index number relative to a base year.
Taking 2004-05 as the base with a value of 100, the average REER of the rupee against six currencies — the US dollar, euro, pound, yen, Chinese renminbi and Hong Kong dollar — worked out to 114.91 in 2010-11, 111.86 in 2011-12 and 105.46 in 2012-13
It meant that the rupee had strengthened against these currencies after correcting for the higher inflation levels in India. It was an ‘overvalued’ currency, in other words
However,since June 2013, the six-currency trade-weighted REER has dropped below 100; the latest number for July was 96.94
It implies the rupee had already substantially corrected by June, when its exchange rate averaged about 58.4 to the dollar. Therefore, at the existing Rs 63-64 levels, the rupee is an ‘undervalued’ currency, given that its ‘real’ parity is around 58 to a dollar. But this is all very well in theory
Taking 2004-05 as the base with a value of 100, the average REER of the rupee against six currencies — the US dollar, euro, pound, yen, Chinese renminbi and Hong Kong dollar — worked out to 114.91 in 2010-11, 111.86 in 2011-12 and 105.46 in 2012-13
It meant that the rupee had strengthened against these currencies after correcting for the higher inflation levels in India. It was an ‘overvalued’ currency, in other words
However,since June 2013, the six-currency trade-weighted REER has dropped below 100; the latest number for July was 96.94
It implies the rupee had already substantially corrected by June, when its exchange rate averaged about 58.4 to the dollar. Therefore, at the existing Rs 63-64 levels, the rupee is an ‘undervalued’ currency, given that its ‘real’ parity is around 58 to a dollar. But this is all very well in theory
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