REER index up 0.41pc in Feb, signaling export price rise

KARACHI: The rupee has shown signs of strength in February, with the Real Effective Exchange Rate Index (REER) rising by 0.41 percent month-on-month to a provisional value of 102.17, up from the revised January figure of 101.75, the State Bank of Pakistan (SBP) data showed on Tuesday.

This marks an 18.13 percent year-on-year increase in REER index compared to February 2023. In parallel, the Nominal Effective Exchange Rate Index (NEER) also rose by 0.99 percent in February to a provisional value of 38.79, from January's revised value of 38.41. However, on an annual basis, the NEER index has seen a marginal decline of 1.27 percent.

The rupee closed February at 279.11 against the dollar, appreciating by 0.14 percent from January 2024. Despite this monthly gain, the rupee has depreciated by 6.31 percent compared to February of the previous year.

The REER, which gauges the cost of a country's goods against those of its main trading partners, suggests a marginal increase in the price of Pakistani exports and a decrease in import costs, hinting at reduced trade competitiveness.

A REER index value of 100 does not imply an equilibrium but rather represents the currency's average value in 2010. Thus, the current REER movement away from 100 reflects changes relative to this baseline year rather than any equilibrium shift.

The NEER, tracking bilateral nominal exchange rates against a basket of currencies from significant trading partners, offers insight into the Pakistani rupee's performance against a wider array of currencies.

The rupee ended flat against the dollar in the interbank market on Tuesday owing to matching demand and supply of the US currency in the market.

Meanwhile, the rupee remained stable against the dollar in the interbank market on Tuesday, with balanced demand and supply. It closed at 278.63. In the open market, however, the rupee strengthened slightly to 281.15 against the dollar.

As remittances and proceeds from exports were enough to meet importer demand, dealers said that the local unit was hardly moved at all. The SBP on Monday held the policy rate unchanged at 22 percent for a sixth consecutive meeting.

During an analyst call, the SBP’s governor Jameel Ahmad said there is no fixed goal level for the REER by the SBP. Rather, monetary aggregates, global inflation, domestic inflation, and a host of other economic variables all have an impact on the REER. Financial inflows showed a modest decline in January amidst continuing public debt repayments in the absence of significant official and private sector inflows, the SBP said in a monetary policy statement.