Real Effective Exchange Rate (REER) of the Indian Rupee
The real effective exchange rate (REER) for the Indian rupee dropped to 97.13 in August, marking its lowest point since October 2018. This decline occurred as the rupee reached a record low of 88.14 against the US dollar.
Undervaluation and Export Competitiveness
- A REER below 100 signifies that the currency is undervalued, which can enhance the export competitiveness of a country.
- A weaker rupee makes Indian goods and services more affordable in global markets, effectively countering tariff-related pressures faced by exporters.
Calculation and Influencing Factors
The REER is calculated as the weighted average of a country's currency relative to a basket of 40 major currencies, adjusted for inflation differentials.
- Since August, the rupee continued to weaken further to 88.84/$1 by October.
- This was driven by geopolitical tensions and trade-related uncertainties.
Role of the Reserve Bank of India (RBI)
- The Reserve Bank of India (RBI) engaged in heavy interventions to contain the rupee's losses and prevent it from breaching the 89/$1 level.
- Earlier in the year, the rupee peaked at 102.27 on the REER index in January, averaging 86.25/$1.
- The currency was overvalued by more than 2% due to sustained RBI interventions, which peaked at $88.7 billion in February.