The rupee had at 73-74 against the dollar in recent times. It also rose sharply against other foreign currencies. With the second wave, it’s weakened compared to the amount reported within the previous year. It depreciated sharply in the months leading up to the outbreak, from 71.54 in January 2020 to 75.59 in May 2020.
The RBI forms the NEER and REER of the rupee by providing a monthly weight index. This is often like CPI or WPI to point out how the costs of products, generally, have changed. The index may be a basket of six currencies and 40-currencies (with FY16 because of the base year).
REER, however, is taken into account a far better measure than NEER, since it also considers the domestic inflation within the various economies. Six major currencies are considered – the economies that make up 88% of India’s exports. The most trading weight of the Euro is 12.69, followed by the UAE dirham and the Chinese yuan, later the US dollar 11.44, 10.84, exports and 8.8.
Analysis of the REER’s movement over the 24 months from April 2019 to March 2021 offers some interesting results. In India, the initial complete lockdown was announced in March 2020. In the 12 months before the lockdown — that is, the FY20-average — reached REER 103.6, which is much higher than the FY21 period.
During an equivalent period, the rupee has fallen by quite 350 bps. Higher REER meant exports were costlier in FY20, and imports were cheaper—as compared to FY21. India’s export competitive REER hit a 28-month low of 99.68 as the rupee continued to depreciate further. In May 2021, the REER rose to 100.41.
With the increase in CPI, at 6.3% in both May and June 2021, there’ll be upward pressure on the costs of commodities. The continued increase in petroleum prices is predicted to feature to the hearth. Major inflation, the non-food and non-fuel component, was 6.4% in May 2021, a worrying factor.
Between April 2019 and 2021, the REER had a limited range of signs and troughs, but the water was still declining. REER synchronizes with inflationary trends – Thanks to inflation the rising bias in the REER has already been felt in May 2021.
Over the last 26 months, India’s inflation has been high compared to the six major currencies considered to be the widening difference between the trends of NEER and REER.
With the bulk of India’s exports being agricultural products, textiles, jewellery, etc, margins on which are generally small, the increase in inflation will adversely impact these. Such sectors tend to profit the foremost when there’s a big depreciation within the rupee. But it may address the decline in the currencies of other emerging markets, which are India’s rivals globally. The rupee had closed at 74.36 at the end of June.
This analysis shows that India’s export competitiveness has improved since FY19, but may lose momentum if inflation remains uncontrollable. Rupee depreciation will not help boost exports.