Introduction

The rupee’s depreciation in late 2024 and 2025 has raised concerns not merely because of its nominal slide but because the Real Effective Exchange Rate (REER) also shows a downward trend. Unlike previous years, when inflation differentials kept the rupee “overvalued,” the REER for 2024-25 has fallen below 100, indicating undervaluation and revealing deeper currency pressures.

Why in the news

The rupee breached the ₹89-per-dollar mark for the first time, closing at ₹89.46, marking a significant psychological barrier. More importantly, the rupee has weakened not only nominally but also in real effective terms, a sharper and broader fall than seen in recent years, including against the euro, pound, yen and yuan. This constitutes a shift from earlier patterns where inflation-adjusted metrics often showed the rupee as stable or overvalued. The current fall is “real,” signaling deeper macroeconomic pressures.

How have the rupee’s effective exchange rates behaved recently?

1. NEER trends: The Nominal Effective Exchange Rate (NEER) fell from a peak of 106.19 (2022) to 103.53 in October 2024, showing broad-based weakening.
2. REER trends: The Real Effective Exchange Rate (REER) also declined from 109.86 (Nov 2024 high) to 97.05, pushing it below the 100-mark, indicating undervaluation.
3. Shift from past pattern: For years, REER stayed above 100 due to India’s higher inflation, which normally made the rupee appear stronger, this trend has reversed.

Why is the current fall described as “real” rather than just nominal?

1. Inflation-adjusted depreciation: The rupee has weakened even after adjusting for inflation differentials with 40 trading partners, capturing “true” competitiveness loss.
2. CPI-driven REER insight: Higher CPI inflation in India (5.2% Oct 2024) versus trading partners like the US (3%), Japan (3%), and Euro Area (2%) historically kept REER high, but the nominal fall is now so steep that REER has slid below 100.
3. Undervaluation signal: A REER below 100 means the rupee is undervalued relative to its long-term average, a reversal from the usual overvaluation.

What explains the rupee’s weakening across multiple currencies?

1. Broad-based decline: Rupee weakened against the dollar, euro, pound, yen, and yuan, not just one currency.
2. Comparative movements: Between Nov 1-28, rupee depreciated:
   1. Against EUR: ₹90.18 to ₹93.36
   2. Against GBP: ₹103.32 to ₹106.37
   3. Against JPY (100 units): ₹54.62 to ₹57.18
   4. Against yuan: ₹11.82 to ₹12.49
3. Higher import costs: Rising global inflation and domestic CPI have jointly exerted pressure.

How does the RBI’s shift to a ‘stabilised arrangement’ matter?

1. IMF reclassification (Nov 2024): India moved from “floating” to “stabilised arrangement”, meaning RBI intervenes more actively to limit volatility.
2. Operational effect: RBI’s increased forex operations indicate greater management of rupee movements.
3. Significance: Signals persistent depreciation pressure requiring defensive central bank actions.

What macroeconomic factors are pushing REER below 100?

1. Persistent CPI inflation: Even modest inflation differentials now fail to offset nominal weakness.
2. Import-price pass-through: Costlier imports make domestic inflation elevated, weakening competitiveness.
3. Global monetary tightening: Stronger dollar and higher yields globally reduce EM currency strength.

Conclusion

The current weakness of the rupee is not merely a nominal slide but a deeper, inflation-adjusted depreciation. With both NEER and REER falling sharply, and REER moving below 100 for the first time in years, the pressure is structural. Combined with higher domestic inflation and global monetary tightening, the rupee’s fall now reflects broader competitiveness concerns rather than short-term volatility.

PYQ Relevance

[UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

Linkage: Protectionism and currency manipulation directly affect exchange rate stability and India’s external sector, a core GS-III theme. They link to rupee depreciation, import costs, inflation, and RBI’s intervention needs.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now