The Indian rupee has recently fallen to a new record low against the US dollar and other major currencies, raising concerns in the financial markets. At the same time, the Real Effective Exchange Rate (REER), which adjusts the nominal exchange rate for inflation differences with trading partners, has reached an all-time high.
What Does a High REER Mean?
The surge in REER indicates that the rupee is overvalued in real terms. This could impact India’s export competitiveness as a higher REER makes Indian goods and services relatively more expensive in the global market. As a result, India’s trade balance may be affected, as foreign buyers may find Indian products less attractive.
Factors Contributing to the Rupee’s Depreciation
Several factors have contributed to the depreciation of the rupee:
- Foreign Capital Outflows: Persistent outflows of foreign capital have put downward pressure on the rupee.
- Strengthening US Dollar: The US dollar has gained strength in the global markets, further weakening the rupee.
- Geopolitical Uncertainties: Ongoing geopolitical tensions have added to the volatility in currency markets.
The Role of the Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) has been actively monitoring the situation and intervening in the foreign exchange market to manage volatility. However, the dual challenges of a weakening rupee and a high REER may present significant policy dilemmas for the RBI in the future.
Potential Policy Measures
Analysts suggest that policymakers may need to focus on:
- Boosting Export Competitiveness: Measures to make Indian goods and services more competitive in the global market could help address the challenges posed by the high REER.
- Attracting Foreign Investments: Encouraging foreign investments could help stabilize the currency and support sustainable economic growth.
Multiple-Choice Questions (MCQs):
- What does a high Real Effective Exchange Rate (REER) indicate about the Indian rupee?
- a) The rupee is undervalued
- b) The rupee is overvalued
- c) The rupee is stable
- d) The rupee is neutral
- Answer: b) The rupee is overvalued
- Which of the following is NOT a factor contributing to the depreciation of the Indian rupee?
- a) Foreign capital outflows
- b) Strengthening US dollar
- c) High REER
- d) Geopolitical uncertainties
- Answer: c) High REER
- What impact does a higher REER have on India’s export competitiveness?
- a) Makes Indian goods cheaper in the global market
- b) Makes Indian goods more expensive in the global market
- c) Has no impact on India’s export competitiveness
- d) Increases demand for Indian exports
- Answer: b) Makes Indian goods more expensive in the global market
- What has the Reserve Bank of India (RBI) been doing to address the weakening rupee?
- a) Reducing interest rates
- b) Increasing foreign capital inflows
- c) Intervening in the forex market
- d) Decreasing the REER
- Answer: c) Intervening in the forex market
- What policy measures do analysts suggest to address the challenges posed by the rupee’s depreciation and high REER?
- a) Reducing foreign investments
- b) Boosting export competitiveness and attracting foreign investments
- c) Focusing on domestic consumption
- d) Increasing the US dollar reserves
- Answer: b) Boosting export competitiveness and attracting foreign investments