Reer Reverses Trend, Falls 0.9% In May

The real effective exchange rate (REER) and the nominal effective exchange rate (NEER) have finally reversed trend to depreciate in May, according to data released by the Reserve Bank of India yesterday.

A depreciation in the effective exchange rates will increase the countrys exports.

Both the REER and NEER depreciated by 0.9 per cent in May over April after appreciating for quite a few months. REER stood at 62.45 and the NEER at 38.80 in May. These rates are based on export weights of 36 countries. There has also been a deprecation in the trade-based weights. The trade-based REER fell by 0.8 per cent to 64.73 in May over the previous month, and the NEER to 39.36.

 

However, sources point out the 36-country bilateral weight is not very relevant as India has very little trade with many of these countries. Besides, some of these countries suffer from very high inflation, which distorts the picture. It is felt that the REER and NEER based on 10-country bilateral wieghts announced in the Economic Survey is more relevant.

Even though the REER and NEER depreciated in May, it is still higher than the level in January when the REER stood at 61.07 and NEER at 37.91 compared with 62.45 and 38.80 in May this year, respectively. The biggest appreciation was in February when the REER jumped 3.1 per cent and the NEER 2.1 per cent.

The slowdown in export growth during 1996-97 has emerged as an area of policy concern and the exchange rate was blamed for it. RBI deputy governor Y V Reddy had recently said that beyond a point real appreciation of the currency can hurt exports.

In August 1995, the rupee exchange rate turned volatile and in the following months the REER depreciated and registered a correction only by January 1996 to touch 59.32. The REER remained stable for most of 1996.

However, the sharp appreciation of the US dollar in relation to other major currencies after the last quarter of 1996 resulted in an appreciation of the rupee in real terms.

In August 1996, the trade-based REER was 62.26 which rose to 64.73 in May this year, up by five per cent. Over January, the appreciation was around 10 per cent up to May.

Reddy had stated that there was no doubt that the rupee was overvalued. But after the release of the May figures, sources point out that the REER might just start depreciating.