The Rupee has Fallen Below its Fair Value

........The real effective exchange rate (REER) — a weighted average of our currency relative to our trading partners’ currencies, adjusted for inflation — is a common measure of the alignment of a currency to its true value. The RBI’s measure of REER uses the wholesale price index (WPI) for India and consumer price index (CPI) for trading partners, we re-estimated the REER using CPI for India as well, with 2005 as the base year. Our estimate of REER was at an average of 11.4 in July. This means that despite the recent depreciation, the rupee was 11.4% higher than its fair value in July. Based on this, observers say the rupee needs to correct more............

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