ISAS Briefs

Indian currency will sink if allowed to float used to be the answer one would often get during classroom discussions in the 1980s on flexible and fixed exchange rates. However, with the remarkable Indian economic performance in the last few years, the Indian rupee has attained respectability and suggests strong underlying fundamentals. The current rupee price of the United States dollar stands at Rs39.29 per dollar (as on 10 January 2008) as against Rs44.53 exactly a year ago, indicating a 12 percent appreciation. This is appreciation of nominal exchange rate and one should perhaps look at real effective exchange rates (REER) that take into account relative price movement in trading partners. The Reserve Bank of India (RBI) estimates REER (based on 36-currency trade based weights) with different base years. Without going into details, it is suffice to note that REER, either based on five currencies or a 36-currency basket, has also appreciated since September 2006.