Rupee's Shift from Overvalued to Undervalued: What It Means for India's Economy
The Indian rupee, which breached the 96-to-the-dollar mark in mid-July amid rising global oil prices, has since strengthened to around 95.9 against the US dollar. This volatility, including an all-time low of 96.96 in May and Brent crude's surge past $126 in April, has brought a significant shift: the rupee is no longer overvalued. In fact, Reserve Bank of India Governor Sanjay Malhotra noted that the rupee may now be undervalued, and could appreciate once tensions in West Asia ease.
To understand whether a currency is overvalued or undervalued, analysts use the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) indices. These indices measure the rupee's value against a basket of currencies of India's major trading partners, weighted by trade shares. The base year is 2015-16, set at 100.
In November 2024, when the rupee averaged 84.4 to the dollar, the NEER was 91.68, indicating an 8.3% depreciation since 2015-16. However, the REER, which adjusts for inflation differentials, stood at 108.03, meaning the rupee was overvalued by over 8% in real terms. This overvaluation made Indian exports less competitive.
By May 2026, the rupee-dollar rate averaged 95.5, driving the NEER to a record low of 77.19 and the REER to 89.08. Although both indices recovered slightly in June, the REER of 91.26 still reflects a real weakening of about 8.7%. This shift from overvaluation to undervaluation could boost export competitiveness and attract foreign investment, but it also risks imported inflation.
The RBI's stance on managing volatility without targeting a specific level suggests confidence in the rupee's current alignment with fundamentals. As global conditions stabilize, the rupee may appreciate, but for now, its lower value offers a strategic advantage for India's trade balance.
