The value of the rupee: A look at the numbers for the year 2014 - 15

RBI Watch                                                                                               Indian Rupee

Over the last one year, the rupee appreciation against a representative basket of currencies appears significant in real terms  - about 9% measured by the Real Effective Exchange Rate (REER). The rupee was close to fair value - at the start of the financial year, but with REER rising to 113.23 it appears significantly overvalued. REER  is the value of the rupee versus a basket of currencies adjusted for inflation between India and the countries in the basket.

In nominal terms, the rupee has also appreciated against a basket of 36 currencies by about 7% as measured by the Net Effective Exchange rate. To give readers a flavour of how this could have happened, the second table shows the rupee movement against some of the world's major currencies. While the rupee fell by 4% against the US dollar, it rose, for example, against the pound by 8%, and 22% against the euro.

The difference between the gain in the rupee  in real and nominal terms is explained by the higher inflation at home compared to the inflation abroad (the 36 countries in the basket used for comparison purposes by the RBI).

The rupee has lost some competitiveness in the last one year from a trade perspective. On the other hand, rupee assets - such as stocks and bonds - for investors from countries such as the Euro area, the UK and Japan have turned out to be attractive given the strengthening rupee. Even against the dollar, the rupee's depreciation has been mild, keeping rupee assets attractive.

The RBI does not target a nominal rate for the rupee. Its intervention in the foreign exchange markets is generally to prevent excessive volatility in the rupee.