By Rahul Mazumdar
Recently, the rupee has been hovering around 73-74 against the dollar. In fact, it was unstable against other foreign currencies. In the second wave, it is weaker than the previous year. From 71.54 in January 2020 to 75.59 in May 2020, it plummeted within a few months with the outbreak of the pandemic. The rupee loses significant value against the dollar and the exchange rate can be an indicator of the competitiveness of the economy. If the rupee falls, it will be cheaper overseas, which will boost exports. RBI Formulate the NEER and REER of the rupee and provide a monthly weighted index. This is similar to the CPI or WPI, which shows how the prices of common commodities have changed. The index is a basket of 6 and 40 currencies (based on 2016).
However, REER is considered a better indicator than NEER because it also takes into account domestic inflation in various economies. The analysis considers six major currencies, the economies that account for 88% of India’s exports. The euro has the highest trade weight at 12.69, followed by the UAE Dirham, RMB and US dollar at 11.44, 10.84 and 8.8, respectively. A decrease in REER indicates a decrease in the value of the rupee, and an increase reflects an increase.
Analyzing the movement of REER during the 24 months from April 2019 to March 2021 yields some interesting results. In India, the first complete blockade was announced in March 2020. The average REER in the 12 months before the blockade, that is, in FY2008, was 103.6, which was much higher than in FY21 (101.8).
During the same period, the rupee fell by more than 350 bps. A high REER means that exports in 2008 are more expensive and imports are cheaper than in 2009. Therefore, the decrease indicates an improvement in trade competitiveness in FY2009. As the rupee continued to fall, the REER reached a low of 99.68 in 28 months, improving India’s export competitiveness. However, India’s export competitiveness, which has shown improvement, can soon face a temporary disruption, primarily due to multiple factors, mainly inflation. REER soared to 100.41 in May 2021. This was one of the fastest spikes in the last 6 months.
Commodity prices will be under upward pressure with a 6.3% increase in the CPI in both May and June 2021. Continued rises in crude oil prices are expected to join the fire. Core inflation (non-food, non-fuel components) in May 2021 was 6.4%, which would be a cause for concern.
REER had mountains and valleys in a limited area from April 2019 to May 2021, but NEER has almost decreased. REER is in sync with inflationary trends. The upward bias of REER due to inflation was already felt in May 2021. The biggest difference between NEER and REER trends over the last 26 months is the six major currencies that take into account domestic inflation in India.
Soaring inflation affects REER, which inevitably pushes up the cost of commodities and affects the competitiveness of India’s exports. However, there is a lag between the fall in the exchange rate and its impact on exports. This is mainly due to contracts signed before exchange rate fluctuations.
Rising inflation has a negative impact on India’s exports, which are mostly agricultural products, textiles and jewelery, with margins generally small. Such sectors tend to benefit most if the rupee falls sharply. However, this could be offset by the depreciation of currencies in other emerging markets, which are global Indian competitors. The rupee at the end of June was 74.36.
According to this analysis, India’s export competitiveness has improved since FY19, but it could lose momentum if inflation continues unabated. Therefore, the depreciation of the rupee alone cannot boost exports.
The author is a senior economist at EXIM Bank
The view is personal
Experience REER and exports
https://www.financialexpress.com/opinion/getting-real-about-reer-and-exports/2302036/ Experience REER and exports