The Hindu Business Line : Real effective exchange rate of rupee declines

Bangalore, Nov. 13 The rupee’s sharp depreciation against the dollar since the beginning of this year has begun reflecting in the Real Effective Exchange Rates (REER)

According to the Reserve Bank of India’s November bulletin, the REER retreated to 103.67 against a six currency basket. In April this year, the index was 112.16.

The REER is the weighted average of nominal exchange rates adjusted for inflation differential against domestic and foreign countries.

The six currency basket with a base of 1993-94 comprised the US dollar, Euro, Yen, Pound Sterling, Hong Kong dollar and Renminbi Yuan. In this basket the US dollar and the Euro have the highest weights at 28.19 per cent and 35.12 per cent.

The weights reflected the bilateral trade between India and the regions represented by currency basket.

The drop in the REER brought it closer to the levels of 2000-01 when it was 102.82.

The Nominal Effective Exchange Rate (NEER is the weighted average of nominal exchange rates in the currency basket against the home currency) since the beginning of this year was 62.58, lower than its April level of 70.63.

Fall against yuan sharpest

A fall in the index implied a depreciation of the rupee against the respective currencies.

Since the beginning of this financial year, the rupee depreciated by 19 per cent against the US dollar. But the rupee’s depreciation against the Yuan was the sharpest, by over 20 per cent for the same period.

For the same period, the Yuan depreciated only 2.7 per cent against the US dollar.

The depreciation of the rupee against the Yuan was indicative of the high trade between the two countries. The high trade was also evident from the increased weightage of the Yuan in the currency basket.

At the beginning of the decade, the Yuan’s weight in the currency basket was 4.65 per cent. The Yuan’s weight currently is 11.96 per cent.

A falling REER and the NEER normally indicate an improved export competitiveness regime.

Export growth in October this year dipped 15 per cent on year on year basis or a little over 20 per cent if the petroleum sector is excluded.

If in the initial years the rupee’s appreciation was on account of massive capital inflows, the correction in the REER since the beginning of this year was largely driven by capital outflows, in particular an exodus by foreign institutional investors.

FII have pulled out about $9.4 billion since the beginning of this financial year.

In addition, oil prices also contributed to the REER correction. Oil prices averaged $74 a barrel in October this year as against $ 105 in April this year.

On a year-on-year basis however, oil prices were lower by $ 5 a barrel, though the lower prices were off set by higher imports during the period.

India’s current level of petroleum imports are about 2.8 million barrels a day, according to estimates made by the International Energy Association.

Last year, the average imports into the country were at the rate of 2.4 million barrels per day at $ 79.21 a barrel. This year, the import basket prices between April and October averaged about $95 a barrel, according to data from the Ministry of Petroleum and Natural Gas.

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