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Critical Topics and Their Significance for the UPSC CSE Examination on August 17, 2024
Daily Insights and Initiatives for UPSC Exam Notes: Comprehensive explanations and high-quality material provided regularly for students
India-Russia in talks to work out exchange rate to ease trade
For Preliminary Examination: Current events of national and international importance
For Mains Examination: GS II & III - International relations, Economy
Context:
Aimed at increasing exports to Russia amid widening trade deficit with the country, the Reserve Bank of India is in talks with the Central Bank of the Russian Federation to work out a currency exchange rate
Read about:
What is Rupee exchange rate?
India - Russia relation
Key takeaways:
Exchange rate
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Fixed Exchange Rate: The value of a currency is pegged or fixed to another major currency (like the US Dollar) or a basket of currencies. The government or central bank maintains this rate.
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Floating Exchange Rate: The value of the currency is determined by market forces, such as supply and demand in the foreign exchange market
- To facilitate trade between two countries without relying on the dollar, an exchange rate is crucial. Challenges with currency often arise from trade imbalances between nations. For example, Russia-China bilateral trade exceeded a record $240 billion in 2023.
- Currently, there is no direct exchange mechanism between the ruble and the rupee; instead, a cross-currency reference is used, which introduces an additional premium.
- The goal is to eliminate this premium by enabling free trade between the two currencies at the same exchange rate without referencing another currency.
- A dynamic exchange rate could potentially boost trade from $4.5 billion to $45 billion. For rupee vostro accounts to function effectively, a direct exchange rate is necessary.
- Typically, exchange mechanisms, apart from those involving the euro or dollar, rely on referencing these major currencies
The Nominal Effective Exchange Rate (NEER) is an index that measures the value of a country's currency relative to a basket of other major currencies. It is a weighted average of bilateral exchange rates, where the weights are typically based on the trade shares with the respective countries.
Key Points about NEER:
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Nominal: NEER is expressed in nominal terms, meaning it does not account for inflation differences between the countries involved.
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Effective: The "effective" part of NEER means that it considers the exchange rate against a group of foreign currencies, rather than just one.
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Trade-Weighted: The currencies included in the basket are weighted according to their importance in the country’s trade. For example, if a country does more trade with the Eurozone, the euro will have a higher weight in the NEER calculation.
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