RBI shifts to CPI-based Real Effective Exchange Rate

MUMBAI: Shifting focus to retail inflation, the Reserve Bank today said it will compute and release Real Effective Exchange Rate (REER) only on the basis of the Consumer Price Index (CPI) as the price index for India from this financial year.

"REER index constructed using a CPI for both India and trade partner countries would ensure a higher degree of comparability of former's international competitiveness vis-à-vis trading partner countries," the RBI said in a release.

REER indicates movements in exchange rates of the home currency against a basket of currencies of trade partner countries and is considered to be an indicator of international competitiveness.

Since October 2013, the RBI has started providing indicative projections of inflation in terms of the broader CPI-Combined.

"Thus, with greater focus on CPI inflation as primary objective of domestic monetary policy, it is pertinent to have an alternative index of REER based on CPI," RBI said.

Till now, in the case of India, the RBI was providing the REER index using the Wholesale Price Index (WPI) for India and CPI for partner countries.

The RBI today released a monthly series on CPI-based REER for both six-currency and 36-currency baskets for the period April 2004 to March 2014.

It said from this financial year, only the CPI-based REER would be compiled and released.