Why in the News
India’s Real Effective Exchange Rate (REER) has moved from overvalued, above 100 until mid-2025, to undervalued at around 91 in June 2026. The rupee is now more undervalued than China’s yuan, a shift driven by oil price volatility and the West Asia war.
What is the Real Effective Exchange Rate (REER)?
- Definition: REER measures a currency’s value against a trade weighted basket of other currencies, adjusted for inflation differentials, with 100 as the base year benchmark.
- Above 100: A REER above 100 signals overvaluation, meaning the currency is more expensive than its trade weighted fair value, hurting export competitiveness.
- Below 100: A REER below 100 signals undervaluation, meaning exports become cheaper and more competitive in foreign markets.
- Current reading: The rupee’s REER at around 91 in June 2026 places it firmly in undervalued territory, a reversal from above 100 as recently as mid-2025.
Why does rupee undervaluation matter now?
- Export competitiveness: An undervalued rupee makes Indian exports cheaper relative to competitors, a potential offset to the tariff pressure Indian exporters face from the United States.
- Oil price link: Volatility from the West Asia war affects oil import costs, which in turn move the rupee’s value against the dollar and the wider currency basket.
- Comparative position: The rupee being more undervalued than the yuan reverses a longstanding pattern where China’s currency was seen as the more actively managed, undervalued one.
- Policy dilemma: Sustained undervaluation aids exporters but raises import costs, including for oil, creating a trade off the Reserve Bank of India must weigh in its currency management.
Conclusion
The rupee’s shift from overvalued to undervalued reflects oil price and West Asia conflict volatility more than a deliberate policy choice. Whether this undervaluation becomes a durable export advantage or reverses with oil price stabilisation remains the open question.