NEER Full Form - What is NEER?

Updated:22 Sep, 2022

NEER stands for Nominal Effective Exchange Rate. 

As per RBI, Effective exchange rates (EER) serve as a gauge for assessing the fair value of a currency, and the external competitiveness of an economy and even serve as guideposts for setting monetary and financial conditions.

With the help of EERs, the exchange rates between multiple countries are calculated. For eg. $1 = ₹78

What is NEER (Nominal Effective Exchange Rate)?

The nominal effective exchange rate (NEER) is the unadjusted weighted average rate at which one country's currency trades for a basket of multiple foreign currencies. With the help of EERs, the exchange rates are decided 

As per RBI, The nominal effective exchange rate (NEER) is an index of the weighted average of bilateral exchange rates of home currency vis-à-vis currencies of trading partners, with weights derived from their shares in the trade basket of the home currency.

While NEER isn't adjusted to inflation, REER(Real Effective Exchange Rate) is adjusted to inflation.

Real effective exchange rate (REER)- It is the NEER adjusted to inflation differentials between the home economy and trading partners.

NEER is not calculated separately for each currency. Instead, it is an index that shows how the value of a country's currency compares to the value of multiple foreign currencies at once

It helps us understand whether a currency is weak or strong, or weakening or strengthening, compared to foreign currencies.

How Does RBI Calculate NEER?

The NEER is calculated as the geometric weighted average of bilateral exchange rates of the home currency in terms of trading partner currencies. Specifically, the NEER can be calculated as follows:

Nominal Effective Exchange Rate

where ‘e’ represents the exchange rate of the rupee against a numeraire,i.e the IMF’s Special Drawing Right (SDR), in index form, and ‘ei’ is the exchange rate of the foreign currency ‘i’ against the numeraire in index form. A rise in ‘e’ or ‘e/ei’ represents an appreciation of the rupee relative to currency ‘i’ and vice versa. ‘wi’ denotes trade-/export-based weight assigned to foreign currency/trading partner ‘i’, while ‘n’ is the number of currencies (other than home currency) included in NEER basket.

Base Year:

Identifying an appropriate base year for the construction/rebasing indices of NEER and REER involves an assessment of macroeconomic and external sector performance to check for general correspondence with internal and external balance. Currently, the base year is 2015-2016 for India.

Basket of Currency:

Every NEER compares a single currency to a basket of foreign currencies. This basket is composed of the most significant trading partners of the native country as well as other significant currencies. The major currencies of the globe are the US dollar, Euro, British pound, Japanese yen, and Australian dollar.

Foreign currency values in a basket are weighted according to the value of commerce with the home country, ie, the value of exports or imports, the total value of exports and imports combined, The weights are frequently related to the assets and liabilities of various countries. 

NEER coefficient above 1 indicates that the national currency is usually more valuable than an imported currency, while a lower than 1 indicates that the national currency is less valuable than the imported currency.

There is no global rule for choosing a currency basket. The basket for the Organization for Economic Cooperation and Development (OECD) differs from the baskets for the International Monetary Fund (IMF), the Federal Reserve, and the Bank of Japan. However, many different institutions rely on the IMF's International Financial Statistics (IFS).

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