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Wednesday, May 09, 2007

What happened to the REER?

In recent days, there has been a considerable focus on whether the recent INR appreciation leaves India with a badly overvalued exchange rate. I have argued that over the last five years, gross receipts on the current account tripled, and that exchange rate + inflation fluctuations have been swamped by other things that were going on which affect exports. Swaminathan S. Anklesaria Aiyer has an article in the Economic Times where he looks at what is going on with the real effective exchange rate and argues that there is no significant appreciation to speak of. I have long been concerned about difficulties in the methodology utilised by the RBI REER series, but am slowly getting convinced that the 36-country measure is done okay.

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