With reference to the Indian economy, consider the following statements : 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct ?

“So, when a currency appreciates (either in real or nominal terms) then it means that its trade is becoming less competitive.• In the case of NER, if the exchange rate is $.014/Rupee and if its value is increasing to $.028/Rupee that means we are getting more dollars per rupee and hence we say that rupee is appreciating and this means that rupee trade is becoming less competitive.• In the same way, if the value of ½ (abroad w.r.t. domestic) in case of real exchange rate is increasing that means rupee is appreciating and since rupee is appreciating, so Indian trade is becoming less competitive or US trade is becoming more competitive.• Now if we want to create an index of real exchange rate and represent the value ½ with 100, then if ½ is increasing (Refer the figure below) that means the real index number 100 will increase, and we will say that rupee is appreciating (in real terms) and rupee (Indian) trade is becoming less competitive.• And if ½ is decreasing then the number 100 will decrease (Refer the figure below) which will mean that rupee is depreciating in real terms and hence (Indian) exports will become more competitive.”

“• If India wants to measure its export competitiveness with respect to its trading partners with just one parameter, then it calculates Real Effective Exchange Rate (REER) which is a weighted average (with respect to trade value) of the Real Exchange Rates of its trading partners. Similarly, if India wants to calculate its nominal exchange rate with respect to a group of other countries, then it can calculate Nominal Effective Exchange Rate (NEER).• When Real Exchange Rate = 1, Nominal Exchange Rate = PPP Exchange rate, and we say that the currencies are at purchasing power parity.”

“• 1947-71: As India was one of the founding members of IMF, India was obligated to follow Bretton Woods system of adjustable peg system of exchange rate. The exchange rate was pegged in terms of US Dollar, which was assigned gold value at a fixed price. India was required to maintain its market exchange rate within ±1 per cent of the defined value. The system followed was also called the Par Value System. Nominal Effective Exchange Rate (NEER) - It is a measure of the value of a currency against a weighted average of a basket of foreign currencies. The currencies are weighted according to the amount of trade with that country.”