



The rupee’s depreciation is neither unusual nor indicative of great stress
₹50 in India and $1 in the US, with an exchange rate of ₹100 per dollar. The real exchange rate is then 0.5, meaning an Indian X is half as expensive as an American X when expressed in a common currency.Now, imagine that domestic prices rise by 10%, so X now costs ₹55 in India, and the exchange rate moves to ₹110 per dollar. The nominal exchange rate has depreciated, but the real exchange rate remains 0.5.
Relative prices have not changed. There is no real depreciation. What matters is whether the exchange rate and domestic prices move differently.A real depreciation occurs only when the exchange rate adjusts more than inflation, making domestic goods cheaper relative to foreign goods; a real appreciation is the opposite.In practice, we do not compare the price of one X in India with one X in the US.
We compare the price of a broad representative basket of goods and services in India with similar baskets in the countries we trade with, and then aggregate these comparisons across trading partners using trade shares as weights.The Reserve Bank of India does precisely this through its trade-weighted real effective exchange rate (Reer) index for a 40-currency basket, with 2015-16 as the base year. On that measure, the rupee today has depreciated by about 6% in real effective terms relative to its 2015-16 benchmark. Of course, no such index can be measured with perfect precision.
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