The real effective exchange rate (REER)

▪️Is the weighted average of a country's currency in relation to an index or basket of other major currencies, adjusted for the effects of inflation. 

 

▪️This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, such as the U.S. dollar, Japanese yen and the euro.

▪️ When the index of REER goes above 100 mark (with index of REER in base year =100), then the domestic currency is overvalued. 

▪️Hence, domestic prices are too high and domestic producers are not competitive. 

▪️If the REER is less than 100, then the domestic currency is undervalued.

▪️The Indices of Real Effective Exchange rate in India are released by Reserve Bank of India.