📉 Real Effective Exchange Rate (REER) and the Indian Rupee
Tracking Currency Shifts, Trade Competitiveness & Market Dynamics

💱 What Is REER and Why It Matters

The Real Effective Exchange Rate (REER) is a powerful tool to understand a country’s trade competitiveness. It measures a currency’s strength relative to a basket of foreign currencies, adjusted for inflation. For India, REER is vital to assessing the global standing of the rupee in trade dynamics.

🔎 Understanding the REER Index

• REER Value (Jan 2025): 107.20, down from 108.14 in November
• 📉 This decrease indicates a modest improvement in export competitiveness, as a lower REER makes exports cheaper
• 💹 However, a rising REER signals reduced competitiveness and cheaper imports

📌 Formula: Weighted average of bilateral exchange rates (based on trade volume) × inflation differentials
⚠️ Note: REER does not consider tariffs or changing trade prices

📉 Recent Rupee Volatility

• The rupee depreciated 3% against the US dollar in 2024
• 📉 December Drop: 1.31% fall
• 💵 The Dollar Index rose to 108.48 (+2.75%), reflecting a stronger dollar globally

These shifts signal the rupee’s vulnerability to external economic pressures, particularly from global interest rates and investment flows. 🌍

🔄 What’s Driving REER Changes?

• 💸 Foreign Portfolio Investor (FPI) outflows
• 📦 Widening trade deficit
• 🏦 US Federal Reserve’s rate adjustments affected investment patterns
• 📉 Strengthening US Treasury yields caused capital to flow out of emerging markets

🏦 RBI’s Interventions to Stabilise the Rupee

• In November 2024, the Reserve Bank of India (RBI) sold a record $20.2 billion in the spot forex market 💵
• This aggressive move was aimed at checking the rupee’s freefall
• Despite this, net short positions in the forward market continued to grow, reflecting ongoing market concerns

🔮 What Lies Ahead?

• Analysts expect the rupee to depreciate further by 20–30 paise
• This outlook is based on:
  • 🛢️ Global economic pressures
  • 💹 Interest rate differentials
  • 📈 Inflation disparity with trading partners

While the REER has softened, making exports more attractive, the rupee still faces significant headwinds in the global marketplace. India’s monetary policies and market resilience will be crucial in navigating the currency and trade landscape in 2025. 🧭

Final Thought: As global economic uncertainties persist, monitoring the REER offers a window into India’s international economic health — balancing export ambitions with the realities of currency dynamics.