The real effective exchange rate (REER) of the Indian rupee fell to 107.20 in December from a high of 108.14 in November. According to the latest data of Reserve Bank of India, REER in January 2024 was 103.66. In the year 2024, the rupee had declined by 2.8 percent against the dollar, whereas so far this year in January it has fallen by 1.2 percent.
According to market participants, REER is expected to decline further in January 2025. The REER reflects the inflation-adjusted, trade-weighted average value of a currency against its trading partners and is commonly considered an index of external competitiveness.
The rupee had declined by 1.31 percent in December. The dollar index had increased by 2.75 percent to 108.48 in this month. This index assesses the strength of the dollar against a basket of six major currencies.
The rupee depreciated mainly due to excessive outflow of funds by foreign portfolio investors due to rise in US treasury yields. The dollar also strengthened after the Federal Reserve indicated that it would cut rates less than expected. In this sequence, the Central Bank of America had cut interest rates by 25 basis points instead of the expected 50 basis points in the beginning of December. Apart from this, the rupee further declined in November due to increase in trade deficit in India’s goods trade.
Amit Pabri, managing director of CR Forex, said, ‘The increase in trade deficit figure was not good and led to withdrawal of funds. We saw that the rupee fell to 85.50 per dollar and this led to a decline in REER. Given the kind of activity we are seeing, the January figures should be even lower.