RBI to start using CPI-based inflation for valuing rupee
The Reserve Bank of India (RBI) will start using consumer prices as the inflation benchmark for valuing the rupee against other currencies. Currently, it values the domestic currency on basis of wholesale prices.
The move is expected to make the central bank less tolerant of appreciation by the domestic currency.
The value of the Indian rupee is set by the market, but the RBI also considers its relative value, called the real effective exchange rate (REER), while value the currency. The central bank doesn't have a target exchange rate but it intervene in the market to whenever there is a need to ease volatility.
The RBI yesterday confirmed that it would now used the consumer price index (CPI) to arrive at the rupee's value on a REER basis. The decision is consistent with the central bank's move to make CPI the main gauge of inflation.
The central bank said in a statement, "REER index constructed using a CPI for both India and trade partner countries would ensure a higher degree of comparability of former's international competitiveness vis-a-vis trading partner countries."
Annual CPI-based inflation rate in February was 8.10 per cent, while WPI-based inflation rate stood at 4.68 per cent. The switch to CPI means the currency was overvalued by nearly 4 per cent in March. It means a REER was at 104.20, up from the mark of 100, where the currency is considered fairly valued.