With reference to the Indian Economy, consider the following statements:

An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee
An increase in Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness
An increase in trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER

Which of the above statements are correct?

1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3

Based on the given statements, the correct statements are as follows:

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee: This statement is correct. NEER is a measure of the value of a currency against a weighted average of several foreign currencies. An increase in NEER indicates an appreciation of the local currency against the weighted basket of currencies of its trading partners.

2. An increase in Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness: This statement is incorrect. An increase in REER implies that exports become more expensive and imports become cheaper, indicating a loss in trade competitiveness.

3. An increase in trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER: This statement is correct. When domestic inflation increases relative to inflation in other countries, it results in a higher price index ratio, which eventually increases the divergence between NEER and REER.

In conclusion, statements 1 and 3 are correct.