MOVEMENTS IN EFFECTIVE

EXCHANGE RATES

Presented By
Nagesh Savukar (2010124)
Piyush Saha (2010148)
 EXCHANGE RATE
 Exchange Rate:
To buy 1 unit of foreign currency how much of domestic currency you need to
spend or vice versa.
• Direct Quotation:

Domestic Price Foreign Quantity

Currency Currency Currency Currency

• Indirect Quotation:

Foreign Price Domestic Quantity

Currency Currency Currency Currency
 EXCHANGE RATE
 NER And RER:

RER= (Domestic Price level/ Foreign Price Level) * NER

 Netimpact of foreign exchange earnings would depend on the

extent of increase in price and the extent of fall in the export
demand.

 Higher Price Elasticity, lower benefits.

 EFFECTIVE EXCHANGE RATE
 NEER: Is obtained by calculating the weighted average of
bilateral nominal exchange rate.

NEER= 100∑ [ (et/eo)/(eit/eio)]wi

 REER: Is obtained by calculating weighted avg of bilateral

real effective exchange rates.

REER= 100∑ [ (et/eo)/(eit/eio) * (Pt/Pit)]wi

 REVISION IN NEER AND REER
 In Nov, 2005 RBI replaced its 5-country indices of (NEER) and (REER) with
new 6-currency indices. It is also revised its 36-country indices.
 The new six-currency indices will include USA, Euro zone, UK, Japan, China
and Hong Kong SAR. French franc and Deutsche mark have been replaced by
euro in the new indices.
 6 countries account for 40% of India’s total foreign trade.
 New 36 country indices include Euro zone as against 5 members of Euro area.
( Belgium, France, Germany, Italy and Netherland).
 These countries accounts for 76% to 85% of India’s total foreign trade.
 In case of five-country indices, 1991-92, 1993-94 and 2003-04, the last
being a moving base updated every year to facilitate comparison with a
more recent period.

 The new six-currency indices will have 1993-94 as fixed base and 2003-04
as a moving base, which will change every year as at present.

 To reflect dynamically changing pattern of India’s foreign trade the new

indices use 3 yr moving average trade weights.
 MOVEMENTS IN EER
 6- currency NEER depreciated by about 35%during 1993-94 to 08-09.

 36- currency NEER depreciated by about 14%.

 There is no clear ascertainable trend in the REER indices.

 In 2007-08 there was overall appreciation in REER due to large inflow of

foreign capital, where as global financial crisis of 2008 led to reversal of
foreign capital flows and sharp depreciation of rupee.
Year NEER NEER REER REER

6- currency 36- currency 6- currency 36-currency

1993-94 100 100 100 100

94-95 96.96 98.91 105.82 104.32

95-96 88.56 91.54 101.27 98.19

96-97 86.85 89.27 101.11 96.83

97-98 87.94 92.04 104.41 100.77

98-99 77.49 89.05 96.14 93.04

99-00 77.16 91.02 97.69 95.99

00-01 77.43 92.12 102.82 100.09

01-02 76.04 91.58 102.71 100.86

02-03 71.27 89.12 97.68 98.18

03-04 69.97 87.14 99.17 99.56

04-05 69.58 87.31 101.78 100.09

05-06 72.28 89.85 107.3 103.35

06-07 69.49 85.89 105.57 98.48

07-08 74.46 93.91 114.23 104.81

08-09 64.87 86.15 104.47 94.62

THANK
YOU