The government is planning a technical trick to trim the rupee?s appreciation. Even though the domestic currency may have risen by over 12% against the dollar in the last fiscal, the forthcoming Economic Survey could show the rupee?s appreciation at 5%.
That statistical sleight of hand follows the government?s plan to redefine the way real effective exchange rate (REER) is calculated. It won?t impact exporters or other sectors reeling from a stronger rupee, but could help tone down the political rhetoric.
The rupee is measured against a basket of six currencies?India?s main trading partners?to estimate its relative value. While the Reserve Bank of India does not officially disclose the list, it is known to include the dollar, pound, yen, yuan, HK dollar and euro.
Now, the government plans to broaden the basket to include 36 currencies to reflect India?s growing trade partnerships. Since the list would include currencies depreciating vis-?-vis the dollar, the rise in REER would be moderated.
?If you go by the 36-country REER, it would show a much lower over-valuation in the Indian currency. A comprehensive REER would reflect the whole gamut of competitiveness,? said HDFC Bank chief economist Abheek Barua.
It would also provide a realistic approach to currency valuation and aid the central bank in exchange rate policymaking. ?The current currency basket on which REER is based has become inappropriate, since India?s trading pattern has changed significantly. It makes sense to include more currencies,? said G Ramachandran, head, global research group, ICICI Bank.
Last month, finance minister P Chidambaram had said that the value of the rupee was market determined and pointed out that the 12% appreciation was against only one currency, the US dollar. He said if the appreciation of the Indian currency were to be calculated on the basis of REER in the year gone by, it would have been just around 5-6%.
Exporters have complained of huge losses and eroding competitiveness as a result of the spurt in the rupee?s value against the dollar. While the government has provided exporters with several tax breaks totalling over Rs 5,000 crore this year alone, the spectre of job losses is turning the subject into a political hot potato.