summary

In July, the indicator measuring the value of the Indian rupee against its major trading partners rose to its highest point in over six years, despite hitting a new low against the US dollar.

Rupee Value Index

According to data from the Reserve Bank of India, the adjusted real effective exchange rate (REER) index rose to 107.33 in July, the highest level since December 2017.

The real effective exchange rate is a commonly used indicator to measure the value of a currency to its trading partners. A reading exceeding 100 indicates that the currency is overvalued. Over the past decade, the rupee has mostly remained above this level.

Market performance

Nevertheless, the rupee has performed relatively poorly compared to other Asian currencies this month, which is related to the closing of yen trades and stock outflows. The central bank's strategy of allowing the rupee to depreciate may aim to correct some overestimation of REER and enhance the country's trade competitiveness.

According to Gaura Sen Gupta, Chief Economist of IDFC FIRST Bank, the intervention of the Reserve Bank of India in the foreign exchange market helps to limit the overvaluation of the rupee. On the REER index, the overvaluation of the rupee slowed down in August

influence factor

At present, the rupee's exchange rate against the US dollar is hovering around 84, down 0.9% so far this year, but according to REER calculations, it has risen by 3.6% between July and July.

Dhiraj Nim, an Indian economist at the Australia and New Zealand Banking Group, said that India's high inflation compared to major trading partners such as China may also lead to a higher REER level.

Editor's Summary

Despite the Indian rupee hitting a new low against the US dollar, its value indicator against major trading partners reached its highest point in over six years in July. This indicates that the rupee is still overvalued on the basis of the real effective exchange rate, which may be due to India's high inflation and the impact of monetary policy.

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Noun Explanation

Real Effective Exchange Rate (REER): An exchange rate indicator of a basket of major trading partners adjusted for relative inflation.

Rupee: The official currency of India.

Reserve Bank of India (RBI): India's central bank responsible for monetary policy and foreign exchange market intervention.

Inflation: A decrease in the purchasing power of money, usually manifested as an increase in prices.

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Major events related to this year

July 2024: The real effective exchange rate of the Indian rupee against major trading partners rises to its highest point in over six years.

August 2024: The rupee hits a new low against the US dollar, increasing market attention to India's monetary policy and economic outlook.