Rupee enters longest undervaluation stretch in seven years as real rate slips to 97.47

Rupee has been undervalued

The Indian rupee is in the midst of its longest stretch of undervaluation in seven years, with the real effective exchange rate (REER) slipping to 97.47 in October, the latest RBI data show. It's the third straight month that the rupee has remained undervalued, reflecting the impact of a softer currency and low domestic inflation.

The nominal effective exchange rate (NEER) has also weakened consistently, dropping to 84.58 in October from 90.85 a year earlier, pointing to broader depreciation pressures against key trading partners.

“Domestic inflation is very low currently, and that is a contributory factor to the REER falling below 100, apart from spot exchange rate depreciation,” Dhiraj Nim, an economist and forex strategist, said, adding that the trend may reverse once inflation edges higher from April.

“India generally grows faster than its trading partners… if REER is around 102–103, then currency tends to be fairly valued, but right now it is certainly undervalued,” Nim said, noting that the present phase is favourable for export competitiveness.

A similar view comes from India Ratings and Research. “The currency is undervalued due to inflation… An undervalued rupee is supportive for exports,” said Paras Jasrai, associate director at the ratings company.

The sustained undervaluation also coincides with the rupee weakening in the spot market. The rupee slipped to 88.3 on September 1 and to 88.7 against the dollar by October 31. Since October 31, the currency has slipped around 0.6 percent, touching a record low of 89.49 on November 21 amid a firm dollar and fragile global risk appetite.

Historically, the rupee’s REER tends to hover above 100, and extended periods below that threshold are uncommon. The last comparable stretch, based on RBI’s 40-currency index, occurred in 2016–17, when global commodity volatility and capital outflows kept the rupee undervalued for several months.