With reference to the Indian economy, consider the following statements: 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing 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. Statement 1: The Nominal Effective Exchange Rate (NEER) represents the weighted average of bilateral nominal exchange rates of the home currency (rupee) in terms of foreign currencies. An increase in NEER signifies that the rupee has strengthened or appreciated against the basket of these foreign currencies. Thus, statement 1 is correct. 2. Statement 2: The Real Effective Exchange Rate (REER) adjusts the NEER for inflation differentials between the home country and its trading partners. An increase in REER implies that domestic goods are becoming relatively more expensive compared to foreign goods. This indicates a *decrease* or worsening in trade competitiveness, not an improvement. Thus, statement 2 is incorrect. 3. Statement 3: REER is calculated based on NEER and the ratio of domestic inflation to foreign inflation. If domestic inflation rises faster than inflation in other countries, the price level ratio increases. This causes REER to increase more than NEER (or decrease less), leading to an increasing divergence between the two indices. Thus, statement 3 is correct. 4. Since statements 1 and 3 are correct, the correct option is (C).