Real Effective Exchange Rate slips to 29-month low in Sept
Raises hope for export growth
The index of Real Effective Exchange Rate (REER) hit a more than two-and-a-half year low in September at 111.40. The decline raises further hopes for export.
However, the decline during the first nine months has not been very sharp which shows that the rupee might have lost over 13 per cent against the dollar, but is mostly stable or in some cases has appreciated against other major currencies such as Euro, British Pound or Japanese Yen. The index is a basket of six and 36 currencies. For in-depth analysis, 36 currency basket has been taken with a base year of 2004-05. Euro has highest trade weights of 12.69 followed by UAE Dirham, Chinese Yuan and US Dollar at 11.44, 10.84 and 8.8 respectively.
The index is based on Consumer Price Index (CPI) and reflects external competitiveness of a country. Conceptually, the REER, defined as a weighted average of nominal exchange rates adjusted for relative price differential between the domestic and foreign countries, relates to the purchasing power parity (PPP) hypothesis. The RBI publishes this index in its monthly bulletin. Index of REER without inflation becomes Index of Nominal Effective Exchange Rate (NEER).
According to the International Monetary Fund (IMF), REER is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs. An increase in REER implies that exports become more expensive and imports become cheaper; therefore, an increase indicates a loss in trade competitiveness.
DK Pant, Principal Economist with India Ratings, said while the rupee has depreciated sharply vis-a-vis US dollar, REER has remained fairly stable during May-August. “However sharp depreciation in September vis-a-vis major currencies such as Dollar, Pound Sterling, Yen, Euro and SDR led to reduction in over valuation of the rupee vis-a-vis trading partners. This augurs well for exports growth,” he said.
Ajay Sahay, Director-General at Federation of Indian Export Organisations (FIEO), said the current situation presents a mixed picture. “Since 60 per cent export invoices are in dollar and exchange rate of rupee-dollar is very volatile, so gain for exporters will be slightly uncertain. However, new order at the current level will give good gain. On the other hand, Euro and British Pound are comparatively stable, so exporters would like to deal more with these currencies,” he said while adding that countries with currencies depreciated much more than rupee, like Turkey’s Lira, will have better competitive advantage in some goods.
The Government has always maintained that though rupee shed a lot against US dollar, there is a need to show how it has performed against other major currencies. The data shows that the situation is not bad in this regard. This means there is no fundamental problems with the rupee, there are factors such as US Federal Reserve raising rate or trade ward between US and China affecting the Indian currency most. “When ever we talk about current situation of Indian rupee, a balanced picture should be presented which rupee versus dollar and rupee versus foreign currencies minus dollar,” a senior Finance Ministry official said.
He also said that depreciation of rupee has a positive side as it increases the export competitiveness. The government expects export to grow over 16 per cent during the current fiscal while trade data for the first five months show that growth has been on the estimated line. However, there is fear that if China devalues its currency more to challenge US’ move in tariff war, it may have some impact on the Indian goods being exported. This is because Chinese goods will become much cheaper in the global market.