According to Madhavi Arora, Economist, FX and Rates, Edelweiss Securities, the RBI is of the view that it should let underlying trade competitiveness improve gradually as the
trade-weighted exchange rate acts as a natural stabiliser.
Since the devaluation, the report indicates that Egypt's real effective exchange rate--that is, its
trade-weighted exchange rate deflated by inflation differentials--has fallen sharply and it is now around 25% below its long-run average.
The
trade-weighted exchange rate has increased by around 3 percent since May, partly in response to higher export prices.
In both cases, a negative local shock (housing bust in Mian and Sufi 2012, a rising
trade-weighted exchange rate for local manufacturing industries in our study) is assumed to reduce employment in local nontradable industries through a demand channel.
The effective
trade-weighted exchange rate is around 12% higher (indicating a depreciation) since end June-2014.
At the same time, the dinar's
trade-weighted exchange rate rose by around 4 percent.
Will it shift to target the RMB's
trade-weighted exchange rate, or will it continue to target the RMB-U.S.
dollar contributes the largest single currency weight in the construction of this rate, and movements in the yen-dollar exchange rate account for approximately three-fourths of the
trade-weighted exchange rate's annual variation.
"With this weak manufacturing print, the high likelihood of a technical recession, and falling core inflation, we think the conditions are right for the central bank to ease the pace of appreciation of its
trade-weighted exchange rate band," Credit Suisse economist Michael Wan said in a note to client.
The gap (e - [e.sup.*]) gives the nominal
trade-weighted exchange rate's deviations from a long-run trend path.
Many studies that presume an export role for FDI concentrate on
trade-weighted exchange rate measures.
This rebalancing of growth will be driven by the 8 per cent decline in this year's expected
trade-weighted exchange rate compared with 2007.
