REER slips to 103.3 in January amid external sector watch

Pakistan’s Real Effective Exchange Rate (REER) index declined to 103.3 in January 2026, down from 103.6 in December 2025, according to the State Bank of Pakistan (SBP). The 0.3-point month-on-month dip reflects a marginal real depreciation of the rupee against a basket of trading partner currencies.

While the movement is modest, it carries signaling value. The REER, benchmarked to 2010=100, adjusts the nominal exchange rate for inflation differentials between Pakistan and its trading partners. A reading above 100 indicates that the rupee is relatively strong in real terms compared to the base year. At 103.3, the currency remains somewhat elevated, suggesting that domestic goods are still relatively more expensive compared to competitors when inflation is taken into account.

The slight easing in January could provide limited support to export competitiveness, particularly at a time when the external sector remains under scrutiny. A lower REER generally makes exports more price-competitive and discourages imports by raising their relative cost. However, the current adjustment is too small on its own to materially shift trade dynamics.

Over the past two years, the REER has fluctuated within a relatively narrow band above 100, indicating that Pakistan has largely avoided sharp real overvaluation but has also not seen a sustained period of deep real depreciation. This relative stability suggests that the nominal exchange rate has broadly moved in line with inflation trends, preventing major imbalances from building up in real effective terms.

That said, the trajectory of the REER will depend heavily on domestic inflation. If Pakistan’s inflation runs higher than that of its trading partners without a corresponding nominal depreciation, the REER could rise again, eroding competitiveness. Conversely, contained inflation alongside exchange rate flexibility could help gradually bring the index closer to equilibrium levels.

In the context of recent current account fluctuations, even small changes in the REER are being closely watched. For policymakers, the challenge remains balancing external competitiveness with exchange rate stability and inflation control. January’s data suggests mild relief, but not a decisive shift in the rupee’s real effective position.