Let rupee fall to retrieve the competitive edge of exports

India’s rupee has been remarkably resilient while others are slumping against the dollar, thanks largely to the vastly improved fundamentals and expectations the economy is set for a take off. There is a price though. Exports are losing competitive edge because the rupee has appreciated against currencies of competing countries.

What is REER?

The "real effective exchange rate" (REER) is different from the market determined exchange rate which are called the nominal exchange rates. REER is a derived rate calculated with reference to a basket of currencies of countries with which a country trades. It is the weighted average of nominal exchange rates adjusted for difference in inflation and prices. It gives a better idea of the exchange rate competitiveness of a country.

The weights of different currencies are decided by the level of trade balance between the two countries or just exports. It is accordingly called trade-weighted or exports-weighted REER. It is usually set out as an index with base 100 in some reference year. In India’s case the REER is referenced to FY05 with an index of 100 in that year. This would isolate movements vis-avis a particular currency to give a wider trend. For instance, Indian rupee has depreciated against dollar but appreciated against a basket of currencies.