Real Power of Rupee: For some time now, there have been reports of the rupee weakening against the dollar, but there is another aspect to it as well which needs to be understood.
US Dollar vs Indian Rupee: If you watch movies, then you must have heard a superhit dialogue from Shahrukh Khan’s movie Baazigar, ‘The one who wins after losing is called a Baazigar’. Something similar is happening with our rupee. The status of the Indian rupee has increased despite being weak against the dollar. Recently, the rupee weakened against the US dollar and reached its lowest level ever at 85. This news created concern, but it also has another aspect.
This is how the impact has increased
Our currency has weakened against the US currency, but it should also be seen as a strengthening of the dollar rather than a fall in the rupee. In other words, the rupee is not as weak as it appears from here. In November, the Real Effective Exchange Rate (REER) index of the rupee reached a record 108.14. In this way, it has gained about 4.5 percent strength in the current calendar year.
It is also important to understand this
The increase in REER reflects the growing influence of our rupee. REER measures the rupee not only against the dollar but also against other global currencies. India does not trade only with America, it has business relations with other countries as well. It is involved in import and export with them. Therefore, it is not right to link the strength or weakness of the rupee only with the US dollar. What is its exchange rate with global currencies is also important.
Now the rise is coming continuously
The Real Effective Exchange Rate measures the impact of the rupee against a basket of 40 currencies of countries that account for about 88 percent of India’s annual exports and imports. REER also adjusts for the inflation difference between India and each of these trading partners. The real effective exchange rate of the rupee was 105.32 in January 2022. It fell to 99.03 in April 2023, but has since risen. It climbed to 107.20 in October and 108.14 in November this year.
How does EER work?
EER is measured by an index similar to the Consumer Price Index (CPI). CPI is an index that measures the average price of goods and services purchased by consumers in a given month or year relative to a fixed base period. EER is an index of the average weightage of the exchange rate of the rupee against the currencies of India’s major business partner countries. The weightage of the currency is derived from the share of different countries in India’s total foreign trade, just like CPI.
Strength in comparison to these
It is important to understand about the dollar and the rupee that the rupee has not weakened as much as the US dollar has strengthened. Between 27 September and 24 December, the rupee has fallen from 83.67 to 85.19 against the dollar. Whereas during this period, the rupee has weakened from 93.46 to 88.56 against the euro, from 112.05 to 106.79 against the UK pound and from 0.5823 to 0.5425 against the Japanese yen. That is, the influence of our rupee has increased.
Reason for strength in dollar
In other words, the rupee is not weakening as much as the dollar has strengthened against all currencies. The dollar is strengthening because Donald Trump has warned of a universal tariff hike. He has expressed his desire to impose heavy taxes on goods from many countries including China.
