Paper: GS – III, Subject: Economy, Topic: Trade and External sector, Issue: The Rupee’s Shift from Overvaluation to Undervaluation.
Context:
The Indian rupee recently weakened sharply amid higher global crude-oil prices and geopolitical tensions in West Asia. RBI’s Real Effective Exchange Rate (REER) indicates that the rupee has moved from being overvalued in 2024–25 to undervalued in 2026.
Key Takeaways:
Explanation:
Understanding the Indicators:
- A REER above 100 generally indicates real appreciation and possible overvaluation of the rupee, while a value below 100 suggests real depreciation and possible undervaluation.
- The rupee’s REER declined from 108.03 in November 2024 to 91.26 in June 2026, indicating substantial real weakening.
- REER can fall when the rupee depreciates nominally or when Indian inflation becomes lower relative to inflation among trading partners.
Reasons for Depreciation:
- Higher crude-oil prices increase India’s import bill and demand for US dollars because India imports most of its crude requirements.
- Foreign portfolio outflows, global risk aversion and geopolitical uncertainty can further weaken the rupee.
- Interest-rate movements and the strength of the US dollar also influence capital flows and exchange rates.
Economic Implications:
- An undervalued rupee can make Indian exports cheaper and more competitive in international markets.
- However, export gains depend on foreign demand, domestic production capacity and the imported content of exported goods.
- Depreciation makes crude oil, fertilisers, machinery and electronic components costlier, potentially causing imported inflation.
- It also increases the rupee cost of servicing foreign-currency debt and overseas education or travel.
- Therefore, neither appreciation nor depreciation is automatically beneficial, stability aligned with economic fundamentals is preferable.
Conclusion:
REER provides a broader assessment of currency competitiveness than the rupee–dollar rate alone because it incorporates trade weights and inflation. A sustainable recovery requires geopolitical stability, manageable oil prices, strong exports and sound macroeconomic fundamentals.
Source: (The Indian Express)
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