Real Ef­fec­tive Ex­change Rate slips to 29-month low in Sept

Raises hope for ex­port growth

The Hindu Business Line - - NEWS - SHISHIR SINHA

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.

Mixed pic­ture

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.

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