RUPEE PERFORMANCE -
ECONOMY
News: How the rupee has
‘strengthened’ under Modi government
What's in the news?
●
Between the end of April 2014 and the present, the
rupee has experienced a depreciation of 27.6% against the US dollar, declining
from Rs 60.34 to Rs 83.38.
Factors Influencing
Rupee's Strength:
1. Global Trade
Dynamics:
●
India's trade extends beyond the US, involving
various countries for both exports and imports.
2. Exchange Rates with
Global Currencies:
●
The rupee's strength or weakness is not solely
determined by its exchange rate with the US dollar but also with other
currencies worldwide.
Effective Exchange Rate
(EER):
●
The EER is computed akin to the consumer price
index (CPI).
Methodology:
●
It represents the weighted average of the rupee's
exchange rates against major trading partners' currencies.
●
Weights are based on countries' shares in India's
total foreign trade, akin to CPI's weightage for different commodities.
Types of EER Measures:
1. Nominal EER (NEER):
●
NEER indices are formulated by the Reserve Bank of
India (RBI) against both six hard and 40
soft currencies.
●
The former reflects a trade-weighted average
exchange rate against key currencies like USD, Euro, Yuan, Pound, Yen, and Hong
Kong Dollar.
●
The latter covers a broader basket representing 88%
of India's trade flows.
2. Real EER (REER):
●
It adjusts
NEER for inflation differences between India and its trading partners.
●
If the nominal exchange rate falls less than
domestic inflation, indicating appreciation, it signifies a real appreciation.
Important Takeaways:
1. NEER Trends:
●
Over the years, the rupee's NEER against both
baskets has declined, though less
than its depreciation against the US dollar.
2. REER Trends:
●
The rupee has demonstrated real strengthening over
time, maintaining a value of 100 or above in 9 out of the last 10 years.
●
However, this contrasts with its nominal
depreciation against global currencies.
3. Implications of REER
Increase:
●
Higher REER indicates rising export costs relative to import prices, potentially
impacting trade competitiveness adversely in the long term.