InvestorQ : What is REER and how does it impact the exchange rate?
Jignesh Gupta made post

What is REER and how does it impact the exchange rate?

Maniish Lofar answered.
3 years ago
Is the exchange rate undervalued or overvalued. That is the question that the REER answers. The Real Effective Exchange Rate (REER) is a useful measure to determine whether the currency is fundamentally overvalued or undervalued. The trigger is normally inflation differential. For example, if Indian inflation is at 4% and US inflation is at 1%, then under normal circumstances the INR should depreciate by 3% each year against the USD. However, despite higher inflation compared to other developed nations, the elevated flows from FIIs and FDI ensures that despite having an overpriced REER, the INR continues to strengthen. Of course, there is really no single factor that determines the INR value and more often than not it is the combination of all these factors that has a bearing on the INR/USD exchange equation. When REER is unfavourable for the economy, like it was for India in the past, the exporters tend to suffer as a strong domestic currency is negative for exports.