Trade-weighted indices of a currency's value against a basket of other currencies: the Nominal Effective Exchange Rate (NEER) is the weighted average without adjusting for prices, while the Real Effective Exchange Rate (REER) adjusts the NEER for relative inflation between countries.
- The NEER is a weighted average of bilateral exchange rates against the currencies of major trading partners, with weights based on trade shares.
- The REER takes the NEER and adjusts it for the difference in price levels (inflation) between the home country and its partners, so it reflects real competitiveness.
- A rising REER indicates the currency is becoming dearer in real terms, which can erode export competitiveness; a falling REER improves it.
- The RBI publishes NEER and REER indices for the rupee against baskets of partner currencies; verify the latest base year and basket.
- They give a broader picture of the rupee than a single bilateral rate like the rupee-dollar rate; see concept devaluation vs depreciation.
The NEER-versus-REER distinction (without versus with inflation adjustment) and the REER as a competitiveness gauge are testable external-sector facts.
NEER ignores inflation differences; REER adjusts for them; a rising REER signals reduced export competitiveness, even if the nominal rate looks stable.
NEER is the trade-weighted nominal rate; REER adjusts it for inflation to show real competitiveness; both published by the RBI.