Strengthening rupee and trade competitiveness

India has two currency baskets against which the REER (Real Effective Exchange Rate) of the rupee will be monitored by RBI. One basket includes a six currencies in it viz., US dollar, Euro, Yen, Pound sterling, Chinese Yuan and Hong Kong dollar. The other basket includes 36 currencies from various countries where India has most of its trade competitors.

The recent strengthening of the rupee against the US dollar is feared by some to adversely impact the international trade competitiveness of Indian products and services. SSA Aiyar’s article in today’s ET argues that this strengthening will not be disastrous for our exports.

He says that we should look at the REER of Indian rupee vis a vis the 36 currency basket as this includes many middle and low-income countries with whom India competes keenly in exports. While the REER of the rupee is at 108.20 against the 6 currency basket, it is at 97 to 98 against the 36 currency basket. This is because India’s rupee has for years weakened against the currencies of many of these countries. Hence, he argues that the Indian exports will not become uncompetitive.

This is just a view taken by him. Events that unfold in the rest of the year may present a totally different picture. But nevertheless we look at it because, it gives us a chance to look at international trade and our rupee’s strengthening from a different perspective.