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    Question

    Which of the following statements about REER is not

    correct?
    A The REER is the weighted average of NEER adjusted for inflation Correct Answer Incorrect Answer
    B REER is computed using inflation differential based on WPI Correct Answer Incorrect Answer
    C REERs are summary indicators of movements in the exchange rates of home currency Correct Answer Incorrect Answer
    D All of the Above Correct Answer Incorrect Answer
    E None of the Above Correct Answer Incorrect Answer

    Solution

    Real Effective Exchange Rate (REER) is an average of bilateral nominal effective exchange rates (NEER) that have been adjusted for inflation i.e. relative price differential between the domestic and foreign countries. The REER is the weighted average of NEER adjusted for inflation. REER is computed using inflation differential based on CPI (base year is 2004-05) (and not WPI). REERs are summary indicators of movements in the exchange rates of home currency against a basket of currencies of trade partner countries and are considered to be an indicator of international competitiveness. Reserve Bank is providing the REER index (6 and 36 currencies). In order to calculate the weights, the geometric average of India’s bilateral trade (exports plus imports) with countries/regions represented by the 6 currencies/ 36 currencies is taken.

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