REER as rupee's fair value signal is hazy

An informed and data driven debate on estimating a currency's valuation is required

During the brief respite from the sharply rising volatility in most emerging market (EM) exchange rates (including the rupee), key policy decisions on exchange rate management — as those on Friday — must be based upon a sense of a “fair value” of the currency. The recent sharp depreciation of the rupee has re-ignited the debate about a fair value of the currency. The metric widely used for this is the Real Effective Exchange Rate (REER). The REER, while probably the most parsimonious, is a very ambiguous measure of fair value, and needs to be interpreted with due caution. The