A change in India's effective exchange rate indices

The effective exchange rate indices serve as a gauge for assessing the fair value of a currency, the external competitiveness of an economy and even serve as guideposts for setting monetary and financial conditions (RBI). However, structural changes in the Indian economy and a change in the main trading partners of India have led the central bank to review and update both the nominal and real effective exchange rate indices in terms of a number of currencies, their weights, and the base year. Eight new countries have been added to the currency list – Angola, Chile, Ghana, Iraq, Nepal, Oman, Tanzania, and Ukraine.

The central bank used two main criteria – no high or volatile inflation (as their currencies tend to experience rapid nominal declines, undermining the stability of the indices and obscuring their usefulness in the assessment of external competitiveness), and regular availability of data. This has also resulted in a revision of weights for many countries and regions, such as the US, which now assigned the highest weight in the export basket. Base year selection is dependent on a complicated assessment of internal and external balance that involves real output, inflation, current account, capital inflows, and foreign exchange reserves. This led to 2015-16 being chosen as the base year.

Source: CEIC, Reserve Bank of India