### Definition & Methodology 1. NEER is the weighted geometric average of the bilateral nominal exchange rates of the home currency in terms of foreign currencies 2. 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 differential. 3. REER has 3 factors-exchange rate of respective countries, trade weights and relative prices. 4. Methodology - [Link](RBI_Monthly_Bulletin_Article_20140411_Real%20Effective%20Exchange%20Rate%20based%20on%20CPI%20as%20Price%20Index%20for%20India.pdf#page=3&selection=6,0,6,58) 5. 1993-94 (WPI) as base year - figures for the period 1994-95 to 2004-05 are based on Wholesale Price Index (WPI) series with base year 1993-1994=100 6. 2004-05 (CPI) as base year - figures for the period 2005-06 to 2024-25 are based on Consumer Price Index (CPI) with base year 2004-05=100 7. [Nov 04, 2005](RBI_Press%20Release_20051104_RBI%20to%20revise%20NEER-REER%20Indices.pdf) 1. The 5-country indices was replaced with new six-currency indices of NEER/REER. 2. The thirty six country indices have also been revised and replaced with new 36-currency indices of NEER/REER. 3. So REER index for Indian rupee started getting computed based on 6-currency as well as 36-currency basket 8. Formula: 1. $\text{REER} = \prod_{i=1}^{n} \left[ \left(\dfrac{e}{e_i}\right) \times \left(\dfrac{P}{P_i}\right) \right]^{w_i}$, where the - $e = \text{Exchange rate of INR per SDR (in index form)}$ - $e_i = \text{Exchange rate of partner currency } i \text{ per SDR (in index form)}$ - $w_i = \text{Trade weight of partner } i$ - $\text{nominal component (relative) is} \left(\dfrac{e}{e_i}\right)$ - $\text{the relative price/inflation component is $\left(\dfrac{P_{\text{India}}}{P_i}\right)$ 1. We take base year INRSDR, say $110\text{ INR} = 1\text{ SDR} \text{ which implies } 0.009091\text{ SDR/INR}$ and INRSDR in the new period $140\text{ INR} = 1\text{ SDR} \text{ which implies } 0.00714\text{ SDR/INR}$. We find Index value = many SDRs are now required in new period to buy same amount of INR that 100 SDRs bought. 2. So now only 78.57 SDR is required to buy same amount of INR. However, Indian basket is now expensive by 3%. So new price index is 103. So total SDR required to buy the same basket will be $78.57 \times 103$. We do same for another country for the denominator, take weights and multiply by 100 at the end or within bracket for each country (both are same) 3. Higher the REER, less competitive is Rupee. So it is desirable to have REER below 100. 4. If REER goes higher, we say INR has appreciated in real effective terms, as more foreign purchasing power (measured in terms of SDR) is required to purchase the same basket. 1. If REER goes higher despite nominal depreciation of INR relative to trading partners, INR has appreciated in real effective terms because higher domestic inflation relative to trading partners outweighed the nominal depreciation. 2. If REER goes higher despite lower domestic inflation relative to trading partners, INR has appreciated in real effective terms because nominal appreciation of INR relative to trading partners outweighed the inflation effect. 5. If REER falls, we say INR has depreciated in real effective terms. > [!important] Further Reading > 1. Article [Real Effective Exchange Rate and its Implications for India’s Trade Balance](RBI_Monthly_Bulletin_Article_20241224_Real%20Effective%20Exchange%20Rate%20and%20its%20Implications%20for%20India’s%20Trade%20Balance.pdf) in RBI Monthly bulletin-December 2024 > 2. Article [A Suite of Approaches for Estimating Equilibrium Exchange Rates for India](RBI_Monthly_Bulletin_Article_20250117_A%20Suite%20of%20Approaches%20for%20Estimating%20Equilibrium%20Exchange%20Rates%20for%20India%202.0.pdf) in RBI Monthly bulletin-January 2025 > 3. Article [Effective Exchange Rate Indices of the Indian Rupee](RBI_Monthly_Bulletin_Article_20210121_Effective%20Exchange%20Rate%20Indices%20of%20the%20Indian%20Rupee.pdf) in RBI Monthly Bulletin-Jan 2021 >RBI Bulletin. (Jan, 2021). Effective Exchange Rate Indices of the Indian Rupee. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20020) ### April, 2014 1. April, 2014 - RBI started publishing CPI-only REER 1. [Box II.8-Box Information Content from the CPI-based REER](RBI_Annual%20Report_2014.pdf#page=73&selection=4,0,5,43) in RBI's Annual Report-2014 2. Article [Real Effective Exchange Rate based on CPI as Price Index for India](RBI_Monthly_Bulletin_Article_20140411_Real%20Effective%20Exchange%20Rate%20based%20on%20CPI%20as%20Price%20Index%20for%20India.pdf) in RBI Monthly bulletin-April 2014 2. Jan, 2021 - Base-year of REER was changed to 2015-16 from 2004-5, and 36-currency basked was increased to 40 and 2022-23 3. RBI releases this data as part of its communication policy and to aid researchers and analysts. ### June 2026 1. Chart IV.18b in the article "State of the Economy" in July 2026 bulletin shows the [decomposition](State%20of%20the%20Economy-July%202026%20Bulletin.md#REER%20-%20Chart%20IV.18) of monthly changes in REER ### Data Releases 1. Theses indices are published in the Bank's monthly Bulletin. 2. Data - REER from 1993-94 to 2008-09 in DRG Studies titled "Exchange Rate Policy and Modelling in India" dated Feb 25, 2010 [[neer]] ### References 1. Aug 15, 1997. Exchange Rate Management : Dilemmas. (by Dr. Y.V. Reddy at Goa on August 15, 1997). [pdf](RBI_Speech_19970815_Exchange%20Rate%20Management%20-%20Dilemmas_Y.V.Reddy.pdf) 2. Catão, L. A. V. (2007). What are real exchange rates? _Finance & Development_, _44_(3), 46–47. [pdf-1](IMF_Finance%20&%20Development_2007_%20What%20are%20real%20exchange%20rates?_Catão,%20L.%20A.%20V.pdf) | [pdf-2](IMF_Finance%20&%20Development_2007_%20What%20are%20real%20exchange%20rates?_Catão,%20L.%20A.%20V_2.pdf) | [Link](https://www.imf.org/en/publications/fandd/issues/series/back-to-basics/real-exchange-rates) 3. Govil, R. (2014, November 24–December 3). Exchange rates: Concepts, measurements and assessment of competitiveness [Lecture notes/Presentation slides]. IMF. [Link](https://www.imf.org/external/region/tlm/rr/pdf/nov5.pdf) 4. Ministry of Finance, Department of Economic Affairs. (2016, May 6). _==REER of Rupee_== (Lok Sabha Unstarred Question No. 2262). Government of India. [Link](https://sansad.in/getFile/loksabhaquestions/annex/8/AU2262.pdf?source=pqals) | [pdf](Lok%20Sabha%20Questions_20160506_REER%20of%20Rupee.pdf) 5. RBI Bulletin. (Jan, 2021). Effective Exchange Rate Indices of the Indian Rupee. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20020)