Understanding The Economic Implications Of An Undervalued Rupee

The Indian rupee is currently viewed as undervalued in both nominal and Real Effective Exchange Rate (REER) terms, according to recent assessments by the Reserve Bank of India. This status, characterized by a decline in the REER from approximately 108.03 in late 2024 to 91.26 in June 2026, suggests that the currency's depreciation is largely a reflection of global macroeconomic pressures rather than domestic structural weaknesses.

The valuation of the rupee is influenced by a complex interplay of factors, including the US Dollar Index, global crude oil prices, and foreign capital flows. With India importing a significant portion of its crude oil in US dollars, the recent escalation of conflict in West Asia has intensified downward pressure on the currency. Furthermore, higher interest rates in the US have attracted global capital, leading to FPI outflows from emerging markets, which further complicates the rupee's trajectory.

While an undervalued rupee enhances the competitiveness of Indian exports in international markets, it simultaneously increases the cost of imports, posing risks to inflation and the current account deficit. Despite these external headwinds, the Indian economy shows resilience through a revival in private sector investment and industrial credit. However, the finance ministry remains cautious, noting that global uncertainties could cloud the growth outlook, with GDP projections for FY2026-27 moderated to approximately 6.6%.