With reference to the Indian economy, consider the following statements :
- 1.An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
- 2.An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
- 3.An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct ?
Show answer
Answer: C. Statement 1 is correct: a rise in NEER means the rupee buys more of a basket of foreign currencies, i.e. it has appreciated. Statement 2 is wrong: a rise in REER means Indian goods are becoming costlier relative to trading partners, so competitiveness falls. Statement 3 is correct: REER is NEER adjusted for relative inflation, so higher domestic inflation widens the gap between the two. So 1 and 3.
Watch for: Students assume a 'stronger' REER is good for trade; in fact it makes exports costlier.
Why the other options are wrong
- A. Wrong because a rising REER signals a loss, not a gain, in trade competitiveness.
- B. Wrong because statement 2 is incorrect and statement 1 is correct.
- D. Wrong because statement 2 is incorrect.
Source to check: RBI Bulletin and RBI Database on Indian Economy (NEER/REER indices); NCERT Class 12 Macroeconomics, Chapter 6 (Open Economy)
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.