Understanding REER and Its Economic Implications
The Decrease in India’s Real Effective Exchange Rate: What It Means for the Rupee : The Real Effective Exchange Rate (REER) is a macroeconomic indicator that measures a country’s currency strength against a basket of trading partner currencies, adjusted for inflation. A higher REER suggests an overvalued currency—leading to weaker export competitiveness. A lower REER, as seen recently in India, means the currency is undervalued, making exports cheaper but imports costlier, potentially stoking inflation. As of early 2025, India’s REER fell from 108.14 (Nov 2024) to 107.20, marking a drop in the rupee’s global competitiveness.
Recent Trends in the Indian Rupee
The Indian rupee depreciated by 3% in 2024, with a significant fall of 1.31% in December alone. This was accompanied by a 2.75% rise in the Dollar Index, reaching 108.48. As the US dollar strengthened—primarily due to interest rate decisions by the US Federal Reserve—emerging market currencies like the rupee experienced pressure. The rupee’s weakened status is both a result of global economic trends and India-specific vulnerabilities.
Key Factors Behind REER Decline
The rupee’s weakening and the REER dip were driven by multiple factors:
- Foreign Portfolio Investor (FPI) Outflows: Investors pulled money out of Indian markets, triggering a sell-off in the rupee.
- Widening Trade Deficit: A growing gap between exports and imports exacerbated pressure on the rupee.
- US Fed Policies: Tightening of US monetary policy influenced global capital flows.
- Balance of Payments Stress: Overall international transaction imbalances further weakened the rupee.
These combined factors affected both market sentiment and the rupee’s intrinsic value.
RBI’s Intervention: Stabilizing Efforts
In November 2024, the Reserve Bank of India (RBI) intervened heavily in the foreign exchange market, selling $20.2 billion in the spot market to control the rupee’s fall. Despite this record intervention, forward market positions showed increased net shorts—a signal that traders expected further weakening. The RBI’s action reflects an effort to manage volatility without exhausting its reserves, but long-term stability depends on macroeconomic fundamentals.
Outlook and Projections for 2025
Looking ahead, analysts predict a further depreciation of the rupee by 20–30 paise. The pressure stems from:
- Higher domestic inflation relative to trading partners
- Continued capital outflows
- Global uncertainty in commodity and bond markets
Maintaining macroeconomic stability, enhancing investor confidence, and controlling inflation will be key to stabilizing the rupee’s REER trajectory.
Static GK Snapshot
The Decrease in India’s Real Effective Exchange Rate: What It Means for the Rupee :
| Topic | Fact |
| REER Definition | Weighted average of a currency’s exchange rates, adjusted for inflation |
| REER India (Nov 2024 vs Jan 2025) | Fell from 108.14 to 107.20 |
| RBI Spot Market Intervention | $20.2 billion sold in Nov 2024 |
| US Dollar Index (Dec 2024) | Rose to 108.48 |
| Factors Affecting Rupee | FPI outflows, trade deficit, Fed rate hikes, balance of payments |
| Short-Term Depreciation Outlook | 20–30 paise expected over coming months |
