EXCHANGE-RATE OF THE RUPEE AND PURCHASING POWER PARITY

The authors examine the rupee-dollar rate, the principal exchange rate in the Indian market, in the light of the Purchasing Power Parity the ory. Such an examination has some important policy implications. The C ommittee on Capital Account Convertibility has recommended a Monitorin g Exchange Rate Band of +/-5 per cent-around the neutral REER. An inte rvention regime that tracks movement in REER from a neutral base perio d rate implies that an equilibrium exchange rate carl be worked out on the basis of PPP. How valid is this presumption?