The Reserve Bank of India (RBI) will begin to use consumer prices, instead of wholesale ones, for computing real effective exchange rate (REER) to depict the country's relative competitiveness against trading partners.
The Consumer Price index (CPI)-based REER is the most-frequently used indicator of competitiveness across nations. Thus, the index using CPI for India and trading partner countries will ensure a higher degree of comparability of the country's global competitiveness vis-à-vis trading partners, RBI said in a statement.
The new CPI index measures changes in prices of goods and services consumed by rural and urban households. It is in better position to capture nation-wide actual changes in retail prices at aggregate level.
Further, since October 2013, the RBI has started providing indicative projections of inflation based on the broader CPI-Combined. Thus, with greater focus on CPI inflation as primary objective of Domestic monetary policy, it is pertinent to have an alternative index of REER based on CPI.
