The Hindu Business Line : Six-currency exchange rate indices from December

It is replacing its five-country indices of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) with new six-currency indices. The RBI is also revising its 36-country indices.

The new REER and NEER figures will be announced by December, the RBI said in a release on Friday.

Currently there are three base years in the case of existing five-country indices, 1991-92, 1993-94 and 2003-04.

The last is a moving base updated every year to facilitate comparison with a more recent period.

As against this, the new six-currency indices will have 1993-94 as fixed base and 2003-04 as a moving base, which would change every year as at present.

NEER is an index of the weighted average of bilateral nominal exchange rates.

REER is the NEER adjusted for relative inflation rates.

The exchange rate index is conceptually similar to a stock market index.

Once the objective of determining an effective exchange rate is defined (for example, export competitiveness), several key issues need consideration for actual calculation.

The new six-currency indices will include the US, Eurozone, the UK, Japan, China and Hong Kong SAR.

It will also have two new currencies, the Chinese renminbi and the Hong Kong dollar.

Two currencies in the existing five-country series, i.e. the French franc and the Deutsche mark have been replaced by euro in the new indices.

The existing five-country indices use fixed trade weights, which are based on the average of India's bilateral trade (exports plus imports) with the countries in the index during the five-year period from 1992-93 to 1996-97.

"The new indices will use 3-year moving average trade weights in place of the present fixed trade weights in order to suitably reflect the changing pattern of India's foreign trade with its major trading partner," the release said.

The six countries or regions represented by the six currencies, together accounted for around 40 per cent of India's total foreign trade in 2004-05 compared with a lower coverage of around 22 per cent of India's total foreign trade in the case of existing five-currency index.

The RBI is also revising the 36-country REER/NEER series. The new series has been constructed with 1993-94 as the base year as against 1985 as the base year in the existing indices.

The new series comprises a revised set of currencies for better representation of countries, which have a significant share in India's foreign trade.

The 36 countries together accounted for around 76 per cent of the country's total foreign trade in 2004-05 compared with a lower coverage of around 60 per cent of India's total foreign trade in the case of existing indices.

Just as the revised indices of REER/NEER, the 36-currency indices also use three-year moving average weights in the construction of new series.

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