CURRENCY EXCHANGE RATE

April 21, 2020

The exchange rate of the rupee is an apt marker on the state of the Indian economy’s competitiveness in the aftermath of economic disruption due to the spread of the novel coronavirus disease (COVID-19).

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Essentially, a currency’s exchange rate vis-a-vis another currency reflects the relative demand among the holders of the two currencies. This demand, in turn, depends on the relative demand for the goods and services of the two countries.
If the US dollar is stronger than the rupee, then it shows that the demand for dollars (by those holding rupee) is more than the demand for rupees (by those holding dollars).
The Reserve Bank of India tabulates the rupee’s Nominal Effective Exchange Rate (NEER) in relation to the currencies of 36 trading partner countries.
- This is a weighted index — that is, countries with which India trades more are given a greater weight in the index.
- A decrease in this index denotes depreciation in rupee’s value; an increase reflects appreciation.
The Real Effective Exchange Rate (REER) and is essentially an improvement over the NEER because it also takes into account the domestic inflation in the various economies.