Lok Sabha Question No. 2262 (UNSTARRED), answered on 2016-05-06
Subject: REER of Rupee
Ministry: FINANCE
Asked by: RAMSINH PATALYABHAI RATHWA

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF ECONOMIC AFFAIRS

## LOK SABHA

## UNSTARRED QUESTION NO. 2262

TO BE ANSWERED ON MAY 06,   2016

## REER OF RUPEE

## 2262. SHRI RAMSINH RATHWA:

Will the Minister of FINANCE be pleased to state:

- (a) the method and reason behind calculating the Real Effective Exchange Rate (REER) of the Indian Rupee;
- (b) the weightage assigned to various currencies while calculating the index along with the reasons therefor; and
- (c) the details of REER of the Indian Rupee between 2004-2015?

## ANSWER

## MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI JAYANT SINHA)

- (a)  Real  Effective  Exchange Rate (REER) is  defined as a  weighted  geometric average of nominal exchange rates of the home currency in terms of the foreign  currencies adjusted for relative price differentials. With  the  launch  of  new  Consumer  Price  Index  (CPI), measuring changes in  prices of goods and services consumed by rural and urban households, CPI based REER index is computed for India by the Reserve Bank of India (RBI). The CPI based index of REER is the most frequently used indicator of competitiveness across countries. REER index constructed using CPI for both India and trade partner countries would ensure a higher degree of comparability of former's international competitiveness vis-à-vis trading partner countries. REER has mainly three parameters (i) exchange rate of respective countries, (ii) trade weights and (iii) relative prices.  REER index for Indian rupee is computed based on six currency as well as thirty-six currency basket.
- (b) The RBI calculates CPI based REER index using  3-year moving average trade weights with a view to suitably reflect the dynamically changing pattern of India's foreign trade with its major trading partner countries. In order to calculate the weights, the geometric average of India's bilateral trade (exports plus imports) with countries/regions represented by the six and thirty six currencies during the preceding three years has been taken. The weight of each country/currency in the six and thirtysix currency basket is given in Annex-I
- (c) The details of REER indices (6-currencies and 36 currencies- trade weights) of the Indian rupee since 2004-05 are given in the table below.

| Table : Indices of REER of the Indian Rupee   | Table : Indices of REER of the Indian Rupee   | Table : Indices of REER of the Indian Rupee   |
|-----------------------------------------------|-----------------------------------------------|-----------------------------------------------|
| (Base Year: 2004-05=100)                      | (Base Year: 2004-05=100)                      | (Base Year: 2004-05=100)                      |
| Year                                          | 6-currency basket                             | 36-currency basket                            |
| 2004-05                                       | 100.0                                         | 100.0                                         |
| 2005-06                                       | 104.4                                         | 102.4                                         |
| 2006-07                                       | 103.8                                         | 100.8                                         |
| 2007-08                                       | 113.4                                         | 109.2                                         |
| 2008-09                                       | 103.9                                         | 99.6                                          |
| 2009-10                                       | 110.7                                         | 103.9                                         |
| 2010-11                                       | 124.5                                         | 112.7                                         |
| 2011-12                                       | 121.2                                         | 110.3                                         |
| 2012-13                                       | 117.2                                         | 105.6                                         |
| 2013-14                                       | 112.8                                         | 103.3                                         |
| 2014-15                                       | 119.9                                         | 109.0                                         |
| 2015-16 (P)                                   | 123.5                                         | 112.1                                         |

P: Provisional.   Source: RBI

Annex-I

Trade weights of 36 and 6 countries for 2015-16

|   Sl.No. | 36 countries   |   Weight | 6 Countries   | Weight   |
|----------|----------------|----------|---------------|----------|
|        1 | Euro area      |    0.12  | Euro          | 0.299    |
|        2 | China          |    0.105 | China         | 0.262    |
|        3 | UAE            |    0.099 | USA           | 0.240    |
|        4 | USA            |    0.097 | Hong Kong     | 0.076    |
|        5 | Saudi Arabia   |    0.068 | Japan         | 0.064    |
|        6 | Switzerland    |    0.039 | UK            | 0.058    |
|        8 | Hong Kong      |    0.031 |               |          |
|        9 | Indonesia      |    0.03  |               |          |
|        7 | Singapore      |    0.029 |               |          |
|       12 | South Korea    |    0.027 |               |          |
|       10 | Kuwait         |    0.026 |               |          |
|       11 | Japan          |    0.026 |               |          |
|       13 | Nigeria        |    0.025 |               |          |
|       15 | Qatar          |    0.025 |               |          |
|       14 | UK             |    0.023 |               |          |
|       18 | Malaysia       |    0.023 |               |          |
|       16 | Iran           |    0.022 |               |          |
|       17 | Australia      |    0.021 |               |          |
|       19 | South Africa   |    0.019 |               |          |
|       20 | Brazil         |    0.016 |               |          |
|       21 | Thailand       |    0.014 |               |          |
|       22 | Vietnam        |    0.012 |               |          |
|       23 | Taiwan         |    0.01  |               |          |
|       24 | Russia         |    0.01  |               |          |
|       25 | Bangladesh     |    0.01  |               |          |
|       26 | Israel         |    0.009 |               |          |
|       27 | Turkey         |    0.009 |               |          |
|       28 | Mexico         |    0.009 |               |          |
|       29 | Sri Lanka      |    0.009 |               |          |
|       30 | Egypt          |    0.008 |               |          |
|       31 | Canada         |    0.008 |               |          |
|       32 | Kenya          |    0.006 |               |          |
|       33 | Sweden         |    0.004 |               |          |
|       34 | Pakistan       |    0.004 |               |          |
|       35 | Argentina      |    0.003 |               |          |
|       36 | Philippines    |    0.003 |               |          |