The real effective exchange rate (REER)

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. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index. 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.

The value of REER is an important indicator for deciding the movement of exchange rate. 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. On the other hand, if the REER is less than 100, then the domestic currency is undervalued. Domestic prices are low by international standards and domestic producers are competitive.

 The Indices of Real Effective Exchange rate in India are released by Reserve Bank of India. The bank provides REER using the Consumer Price Index.