EXCHANGE RATE INDICES

[abhishreshthaa]

EXCHANGE RATE INDICES

• NEER
  
• TWER
  
• REER
  
• FEER
  
• LERMS
  
• MLERMS
  

NEER

• Nominal Effective Exchange Rate (NEER)
  
  
• NEER index is based on ‘nominal’, i.e. actual, unadjusted exchange rates
• Index does not take account of inflation

TWER

• Trade-Weighted Exchange Rates (TWER)
  
• The index is an indicator of the appreciation or depreciation of the home currency against the trading partners currency
  
• 2 major disabilities:
  
  Does not give due weightage to the exchange rates of our competitors with whom our bilateral trade may be nominal
  
  Difference in inflation is ignored

REER

• Real Effective Exchange Rate (REER)
  
  
• REER index uses ‘real’ exchange rates, i.e. nominal rates adjusted for the relative inflation, to calculate the index

FEER

Fundamental Equilibrium Exchange Rate (FEER)


Liberalised Exchange Rate Management System (LERMS)

• RBI introduced a new system of exchange rates known as LERMS on 1st March 1992
  
  
• The introduction of the new system was a step to eliminate bureaucratic licensing controls
  
  
• set up a self-balancing mechanism to deal with Foreign Exchange scarcity, bring about self-reliance by giving boost to exports, inward remittances and other forms of foreign earnings.

The basic elements of the system were

• To bring equilibrium between demand and supply
  
  
• To confine market operations to authorized and approved transactions and operate within the framework of import regulatory regime
  
  
• To establish an orderly market mechanism, with a built-in provision to intervene in the market
  
  
• The main features of the system were
  
  
• All receipts under current transactions were required to be surrendered to authorize dealers
  
  
• While 40% of the proceeds would be converted into rupees at RBI official rate, the remaining 60% would be converted at the free market rate quoted by authorized dealers
  
  
• The foreign exchange received by RBI at official exchange rate was meant to cover import of essential commodities namely life saving drugs, crude oil, diesel, kerosene and fertilizers as authorized by the GOI through its Foreign Exchange Budget
  
  
• All other import transactions were to be met out of foreign exchange available in the free market
  
  

Modified Liberalised Exchange Rate Management System (MLERMS)

The rupee became fully floating with effect from 1st March 1993 with the introduction of the Modified Liberalized Exchange Rate Management System

Features

• All foreign transactions permitted to be transacted by authorized dealers
  
• The authorized dealers have been given the freedom to retain the entire foreign exchange
  
• RBI is required to sell to any authorized person the US Dollars, for meeting foreign exchange payments on the exchange rates based on the market rates only, for the approved purposes.