RBI to compute Real Effective Exchange Rate based on CPI as against WPI

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RBI to compute Real Effective Exchange Rate based on CPI as against WPI
The Reserve Bank of India has said that the Real Effective Exchange Rate based on CPI as Price Index for India made it clear that henceforth i.e. from the financial year 2014-2015 it shall use CPI or Consumer Price Index as against WPI or Wholesale Price Index for calculating the re value of rupee against other foreign currencies. The move underlines RBIs attempt to make CPI-based inflation as the prime measure of inflation.

Real Effective Exchange Rate or REER is the relative value of the rupee that is tracked by the central bank while the value of the rupee against dollar and other currencies is determined by market forces. A REER value of 100 signifies that the domestic currency is fairly valued and any value above and below signifies that the currency is either overvalued or undervalued. Also, with a switch from the current WPI-based REER to the CPI-based REER, the relative value of the currency shall also alter. Know how the value of rupee is determined against the dollar.

In line with its directive, the apex body released a monthly series on CPI-based REER for both 6 and 36 currency baskets for the period April 2004 to March 2014. And as released in the January 2014 RBI Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework, the computation of CPI-based REER is worked out by adjusting the base to 2004-05 as 100 for the back-casted series of new CPI data.

The methodology for the computation of CPI-based Real Effective Exchange Rate as well as its rationale in the current context together with the WPI-based series is also provided for the easy transition for the proposed measure. Moreover, from the current fiscal year, only CPI-based REER shall be computed and released by the RBI.

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