Rupee Turns Undervalued Amid Global Economic And Oil Volatility

Why in the News ?

The Indian rupee has depreciated sharply over the past 18 months, becoming undervalued according to the Real Effective Exchange Rate (REER). The trend reflects global oil price volatility, geopolitical tensions in West Asia, and changing trade competitiveness of the Indian economy.

Rupee’s Recent Movement and Key Drivers

●  The rupee weakened significantly from being an overvalued currency in November 2024 to an undervalued currency by May–June 2026, as indicated by the Real Effective Exchange Rate (REER).

●  The Reserve Bank of India (RBI) reported the REER falling from 108.03 (November 2024) to around 91.26 (June 2026), indicating a substantial real depreciation.

●  The Nominal Effective Exchange Rate (NEER) also declined sharply, reflecting the rupee’s weakening against a basket of major trading partner currencies.

●  Rising crude oil prices, triggered by renewed US-Iran tensions and instability in West Asia, pushed the rupee close to ₹96 per US dollar, increasing pressure on India’s import bill.

●  According to RBI Governor Sanjay Malhotra, the rupee may currently be undervalued, and could appreciate if geopolitical tensions ease and global energy markets stabilize.

●  The depreciation has improved India’s price competitiveness in international markets, although the long-term impact on exports will depend on global demand and domestic manufacturing capacity.

Economic Implications of an Undervalued Rupee

●  An undervalued rupee can make Indian exports cheaper and more competitive in global markets, supporting sectors such as textiles, pharmaceuticals, engineering goods, and IT services.

●  However, it also increases the cost of imports, especially crude oil, fertilisers, and electronic components, contributing to imported inflation.

●  A weaker rupee raises input costs for industries dependent on imported raw materials, potentially affecting profit margins and consumer prices.

●  The rupee’s Real Broad Effective Exchange Rate (RBEER) has also fallen below that of the Chinese Yuan, making Indian goods relatively more competitive than Chinese exports.

●  The future trajectory of the rupee will depend on oil prices, global trade conditions, capital flows, monetary policy, and geopolitical developments in West Asia.

About NEER and REER : ●  Nominal Effective Exchange Rate (NEER) is the trade-weighted average exchange rate of a country’s currency against a basket of currencies of its major trading partners. It does not account for inflation. ●  Real Effective Exchange Rate (REER) adjusts the NEER for inflation differentials between India and its trading partners, making it a better measure of a currency’s real competitiveness. ●  REER > 100 indicates an overvalued currency, making exports relatively expensive and imports cheaper. ●  REER < 100 indicates an undervalued currency, improving export competitiveness but increasing the cost of imports. ●  The Reserve Bank of India (RBI) publishes India’s NEER and REER based on a trade-weighted basket of 40 currencies, representing nearly 88% of India’s foreign trade. ●  Policymakers use NEER and REER to assess exchange rate competitiveness, formulate monetary policy, and monitor the external sector of the economy.