Pakistan’s effective Real effective exchange rate (REER), which measures the currency’s value against the weighted average of many foreign currencies, fell to 99.9 in June, the State Bank of Pakistan (SBP) tweeted.
“The REER was fixed at 99.9 on June 21, while it rose to 103 in April 21,” SBP said in a statement. The central bank added that the exchange rate index fell 2.3% in May 21 as the competitiveness of Pakistani products in international markets improved.
According to the central bank, in June the NEER (nominal effective exchange rate) was 60.01 and the REER was 99.85.
A decline in the rate of return on fixed income capital indicates that exports are becoming cheaper and imports are becoming more expensive; Thus, the decline indicates an increase in trade competitiveness, according to the International Monetary Fund (IMF).
But the importnt question is whether Rupee is undervalued or overvalued?
Simply put, REER is an indicator of the competitiveness of a country’s currency with regard to a basket of other currencies, adjusted for inflation effects. Hence, REER has two components: (i) real exchange rates and (ii) weights assigned to each currency.
REER is calculated in a way so that its value signifies appreciation of the rupee. REER of more than 100 indicates that the rupee is overvalued. Since the current value of the trade-weighted REER index is around 99.9, we see several experts claiming that the rupee is roughly fairly valued.
Rupee closed the month of June-2021 at 157.8/US$
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