WHAT ACTUALLY IT IS ?
REER is a competitiveness index of an country in terms of exchange rates . By definition it is a weighted average value of bilateral exchange rates of domestic /home currency adjusted (takes account ) for relative levels of levels of inflation with respect to currencies of major trading partners ( known as basket of currency).
- the weights are decided by equating/ comparing the relative trade balance of domestic currency against each country within the basket of currencies .
- here weighted average implies that countries with which one country trades more are given significant weight in the index.
- exchange rates are not determined by REER .
EXCHANGE RATES- it is described as price/value of one country’s currency with respect to another country currencies .
- for example – an interbank exchange rate of INR 75 is equal to US$ 1 (United States Dollar) OR INR 75 will be exchanged for each US$ 1.
FORMULA TO CALCULATE REER :
In India Reserve Bank Of India (RBI) tabulates the rupees REER in relation with basket of 6 and 36 currencies trading partners countries .
- in India base year for calculating REER is 2004-05
- 100 is taken as base for measuring /analysing REER
WHO PUBLISHES REER
- in India RBI publishes REER on monthly basis (monthly bulletin).
WHAT DOES IT INDICATES ?
- REER index indicates fluctuation of domestic currency with respect to other trading partner countries
- if REER is >100 then the rupee is appreciated / overvalued i.e REER is increased which indicates that import will increase and export will decrease
- for example -if before INR was US$ 1= INR 75 and it becomes US$ 1= INR 60 , as a result import will increase as we are able purchase things at cheaper rates and export will decrease .
- if REER is <100 then the rupee is depreciated /undervalued i.e REER decreased which indicates import will decrease and export will increase
- for example – if before rupee was US$ 1=INR 60 and it becomes US$ 1= INR 75 , as a result import will decrease as rates are increased and export will increase .
USE OR BENEFITS OF REER
- this index is used to measure / determine a county’s currency value with respect to other major currencies .
- used to understand performance of currency in comparison to other countries and with itself in the past .
- used for determining appreciation and depreciation of country’s currency relative to its trading partners .
- used for research analysis and policy making .
SOURCES –
- study iq
- Wikipedia
-shivani