Real exchange rate: Why the RER is so important

07 Apr 2021

By 2017, the real exchange rate (RER) of India had appreciated by over 18%. There was hardly any significant growth in productivity to warrant such a large appreciation. To understand the RER movement, if in a year India has an inflation rate of 6% and its trading partners have a weighted average inflation rate of 2% and the nominal exchange rate remains the same, then the RER appreciates by 4% that year. Imports become cheaper by 4% due to the difference in inflation rates with the exchange rate remaining the same. Similarly, exports become more expensive by 4%.

Tags
Economic development
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