What is the Nominal Effective Exchange Rate (NEER)?

The Nominal Effective Exchange Rate (NEER) is a weighted index of nominal exchange rates of the local currency in terms of foreign currency. Simply, it can be understood as the specific local currency amount required to buy a foreign currency. The NEER indicates a nation’s competitiveness in the Foreign Exchange Market (FOREX) and is often referred to as Traded Weight Currency Index by FOREX traders. The Nominal Effective Exchange Rate (NEER) is not separately determined for each nation, this index simply shows the value of a domestic currency concerning multiple foreign currencies. Economies also adjust the NEER to control inflation in a nation. The NEER of currency appreciates when the value of the domestic currency increases concerning the other foreign currencies in the same regime, while when its value falls the NEER depreciates.

In the financial year, 2021-22 the Nominal Effective Exchange Rate (NEER) of India was around 93, while Real Effective Exchange Rate (REER) was 104.

What does the Nominal Effective Exchange Rate (NEER) indicate?

The NEER is simply a weight price index and can’t show whether a currency is getting stronger or weaker in real. The NEER simply represents a relative value that indicates the performance of a currency compared to other foreign currencies. However, NEER indicates the pace of growth of any currency concerning any other foreign currency. NEER  can be influenced by many factors, but majorly it’s influenced by the international trade of a nation. There are no standard baskets of currency that are being used to evaluate NEER, different organizations put different currencies in the basket. However, some of the major currencies in the world are US Dollar, British Pound, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, and the Swiss Franc.

How is Nominal Effective Exchange Rate (NEER) Calculated?

The Nominal Effective Exchange Rate (NEER) is a weighted index that is calculated concerning a basket of foreign currency. The value of a foreign currency in a basket can be easily measured with an average of the total value of imports and exports between two nations. If the NEER coefficient is higher then it can be concluded that the domestic currency has a higher value than the compared foreign currency. But if the NEER coefficient is lesser, the domestic currency has a lesser value than the foreign currency in the basket. The NEER can be easily calculated with the below formula.

The currencies are exchanged and converted based on the exchange rates to carry out an easy foreign trade among different nations. In India, RBI has coined two significant exchange rates, nominal effective exchange rates, and real effective exchange rates. These exchange rates are major indicators of a nation’s competitiveness and also a major indicator of currency’s performance.