Background
Exchange rates influence a country's exports, imports, inflation, and overall economic competitiveness.
To assess whether a currency is overvalued or undervalued, economists use Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER).
The Reserve Bank of India (RBI) publishes NEER and REER indices based on a basket of 40 currencies, representing about 88% of India's trade, with 2015–16 as the base year (100).
A REER above 100 indicates an overvalued currency, while a REER below 100 indicates an undervalued currency.
Features
Recent Rupee Movement
The rupee weakened sharply due to:
Rising global crude oil prices.
Renewed US-Iran hostilities and geopolitical tensions in West Asia.
The rupee crossed â‚ą96 per US dollar in July 2026.
It touched an all-time low of â‚ą96.96 per US dollar.
As Brent crude prices moderated, the rupee recovered slightly to around â‚ą95.9 per US dollar.
RBI Governor Sanjay Malhotra stated that the rupee is currently undervalued and could appreciate once geopolitical tensions ease.
Understanding NEER and REER
Nominal Effective Exchange Rate (NEER)
Measures the rupee's value against a basket of major trading partner currencies.
Does not account for inflation differences.
Reflects the nominal external value of the currency.
Real Effective Exchange Rate (REER)
Adjusts NEER for inflation differentials between India and its trading partners.
Considered the true indicator of international price competitiveness.
A rising REER makes Indian goods relatively more expensive globally, reducing export competitiveness.
Shift from Overvaluation to Undervaluation
November 2024 REER: 108.03
Rupee was over 8% overvalued.
June 2026 REER: 91.26
Indicates an 8.7% real depreciation, making the rupee undervalued.
REER remained above 100 until July 2025, indicating the shift is relatively recent.
More Competitive Than the Chinese Yuan
The Real Broad Effective Exchange Rate (RBEER), compiled by the Federal Reserve Bank of St. Louis, compares currencies against 64 trading partners.
Rupee RBEER
November 2024: 106.1
June 2026: 90.15
Chinese Yuan RBEER
November 2024: 92.16
June 2026: 92.24
Since the rupee's RBEER is now lower than the yuan's, it is considered more competitively priced in international markets.
Significance
Improves the price competitiveness of Indian exports.
Makes domestic manufacturing relatively more attractive than imports.
Encourages integration into global value chains.
Supports labour-intensive export sectors such as textiles, leather, engineering goods, and agriculture.
May improve India's trade balance if export demand remains strong.
ChallengeÂ
Higher cost of imports, especially crude oil, fertilisers, and electronic components.
Inflation from imported products may cause higher production and consumption costs.
A competitive currency alone cannot raise exports if there is low global demand.
Geopolitical problems and supply chain disruptions may undo increased exports.
Currency exchange rate fluctuations create uncertainties.
Way forward
Keep the exchange rate stable by RBI intervention without causing too much volatility.
Reduce reliance on foreign oil by using renewable sources of energy.
Make exports more competitive by increasing their quality.
Export to different destinations by entering into FTAs.
Improve logistics and other factors under the PM Gati Shakti initiative.
Value addition in manufacturing through initiatives like Make in India and PLI programs.
Conclusion
The change from overvaluation to undervaluation of the rupee is a critical development in the competitiveness of India in international markets. A lower but stable value of the rupee would help boost the exports sector and local manufacturing, assuming favourable global demand and reduced geopolitical risks. Yet consistent gains from trade will be influenced by much more than exchange rate changes.
