85 breached
The Indian rupee has breached the significant psychological barrier of 85 against the US dollar, marking an all-time low amid a confluence of domestic and global pressures.
The Reserve Bank of India (RBI) in its report highlighted that the Real Effective Exchange Rate (REER) of the Indian Rupee increased to 108.14 in November 2024 from 107.20 in October 2024.
This indicated the Indian unit appreciated by 0.9 per cent month-on-month (m-o-m) in November.
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The nominal appreciation of the rupee was strong enough to outweigh the impact of unfavorable price differences, according to a report titled ‘Real Effective Exchange Rate (REER) and its Implications for India’s Trade Balance’.
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Despite heightened global uncertainties, the rupee exhibited the lowest volatility among major currencies.
In India’s case, changes in REER have an uneven impact on trade balance. A depreciation improves the trade balance more significantly in the short term, while appreciation has a larger impact in the long term, the report said.
“Our empirical findings on India suggest an asymmetrical impact of REER movements on India’s trade balance, with REER depreciation impact on trade balance being more than an equivalent REER appreciation in the short-run and vice versa in the long-run,” the report said.
It further highlighted that in India, REER depreciation tends to improve the trade balance as it makes exports more competitive, while REER appreciation has the opposite effect by making exports more expensive.
Empirical evidence indicates that the impact of REER depreciation on the trade balance is stronger in the short term, whereas REER appreciation tends to have a larger effect in the long run. Several factors, including productivity differentials, terms of trade, government spending, and net foreign assets, influence REER, the report said.
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