Indian Rupee Shifts to Undervalued, Bolstering Exports and Economy

The Indian rupee has undergone a significant shift in its valuation status, moving from being considered overvalued to now largely undervalued. This change, which began to solidify around April-May 2026, has been officially acknowledged by Reserve Bank of India (RBI) Governor Sanjay Malhotra. The original article from The Indian Express, published on July 28, 2026, with an update on July 29, 2026, highlights how this revaluation could potentially benefit India's economy. Historically, the rupee's Real Effective Exchange Rate (REER) index, a key measure of a currency's value against a trade-weighted basket of partner currencies adjusted for inflation, remained above 100 until July 2025, signaling an overvalued position. However, the past one-and-a-half years have witnessed a sharp depreciation of the rupee. By May 2026, the REER slumped to multi-year lows, recorded at approximately 89.08, while the Nominal Effective Exchange Rate (NEER) also reached a record low of about 77.19. Although there was a slight recovery in June 2026, with the REER at 91.26, these figures still indicate a significant real undervaluation of about 8-9%. RBI Governor Sanjay Malhotra recently clarified in an interview that the Indian rupee is "not overvalued" and could even be regarded as undervalued in both nominal and REER terms. This rare public statement from the central bank chief underscores the gravity of the shift. He attributed the rupee's recent weakness primarily to external forces such as prevailing geopolitical tensions (including US-Iran hostilities and the West Asia war), the strengthening of the US dollar, and volatility across emerging markets, rather than any fundamental weakness in India's domestic economy. Understanding currency valuation is crucial here. A currency is deemed undervalued when its market exchange rate is weaker than what its economic fundamentals, including relative inflation rates, productivity growth, and trade performance, would suggest. In practical terms, an undervalued rupee means it buys fewer foreign goods or requires more units of rupees to purchase a dollar than its underlying strength implies. Conversely, an overvalued currency is stronger than a country's economic fundamentals justify, making its exports less competitive in the global market. The implications of an undervalued rupee for the Indian economy are multifaceted. On the positive side, it can significantly boost India's exports by making Indian goods and services cheaper and more competitive in international markets. This increased competitiveness could particularly benefit sectors like textiles, IT services, and pharmaceuticals. Evidence supporting this includes a 6-month high in India's goods exports in May 2026 and the country achieving its highest-ever exports in FY 2025-26. Furthermore, an undervalued rupee can encourage domestic manufacturing by making imported goods more expensive, thereby potentially fostering a shift towards locally produced alternatives. It also makes it cheaper for foreign investors to acquire assets in India, potentially attracting more foreign direct investment. However, the picture is not entirely rosy. An undervalued rupee also presents significant challenges, primarily through higher import costs. India is heavily reliant on imports for crucial commodities like crude oil, electronics, machinery, and fertilizers. A weaker rupee directly translates to higher import bills, which can fuel domestic inflation and lead to increased prices for petrol and diesel. Moreover, it can increase the burden of repaying foreign debt, potentially straining India's external finances if the depreciation is prolonged or excessive. Economists often describe the impact of currency depreciation as a "two-edged sword." While the conventional wisdom suggests it boosts exports, studies, such as one by Exim Bank, indicate that a stronger rupee (appreciation in REER) could, in some contexts, lead to increased exports. This is because many Indian manufacturing sectors, particularly those focused on exports, have a high import dependence for raw materials and inputs. A depreciating rupee, while making final goods cheaper abroad, simultaneously increases the cost of imported inputs, potentially squeezing profit margins and offsetting the export advantage. Therefore, lasting export competitiveness is increasingly seen as dependent on innovation, quality, global value chain integration, and reducing import dependence, rather than solely on currency fluctuations. The RBI maintains that it does not target any specific exchange rate or band for the rupee, and its interventions are solely aimed at curbing excessive volatility and ensuring orderly market conditions. The current assessment from the RBI suggests that the rupee's weakness is a reflection of external shocks rather than underlying domestic fragilities, implying a potential for recovery once global conditions stabilize. The rupee's future movement towards its "fair" value (REER of 100) will largely depend on a sustainable easing of global tensions, the reopening of commercial shipping lanes, and the absence of new geopolitics-induced energy supply shocks. In conclusion, the rupee's transition from an overvalued to an undervalued currency marks a significant economic development for India. While it opens avenues for enhanced export competitiveness and domestic industry growth, vigilance is required to manage the inflationary pressures and increased import costs associated with a weaker currency. The RBI's measured stance and focus on curbing volatility signal a cautious but optimistic outlook for the Indian economy amidst global headwinds.

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