Rupee’s Real Effective Exchange Rate (REER)

Current Context : As of November 2024, the Rupee’s Real Effective Exchange Rate (REER) of the Indian rupee reached 108.14, a rise from 107.20 in October 2024. This is the highest REER level in 2024.

Overvaluation Implication: A REER above 100 indicates the rupee is overvalued relative to the 2015-16 base year, reducing export competitiveness and making imports cheaper.

REER vs NEER:

• NEER: Nominal Effective Exchange Rate; reflects the weighted average of bilateral exchange rates with multiple trading partners but does not account for inflation.
• REER: Adjusts NEER for inflation differences between domestic and foreign economies, providing a better measure of currency competitiveness. 

Calculation: REER = NEER × (Domestic Price Index ÷ Foreign Price Index).

Currency Basket: The indices now include 36 currencies, up from 6, reflecting India’s broader trade relations.