Rupee Continues to Trade in Undervalued Territory
The Indian rupee has experienced a significant decline, dropping from 87.85 to 90.20 against the US dollar between August and December 2025. This depreciation highlights the currency’s fundamental undervaluation, particularly as other emerging market currencies have gained strength during the same period. The Reserve Bank of India’s Real Effective Exchange Rate (REER) indicates that the rupee has remained undervalued, reflecting ongoing foreign capital outflows rather than a deterioration in domestic economic conditions.
Rupee’s Decline Amidst Global Currency Gains
Since August 2025, the rupee has faced a downward trajectory, falling to 90.20 by December. This decline contrasts sharply with the performance of several other emerging market currencies, which have seen appreciable gains. For instance, the South African rand has strengthened by 5%, the Brazilian real by 3.7%, and the Malaysian ringgit by 3.4%. Additionally, currencies from Mexico, China, Switzerland, and the euro area have also appreciated, with increases ranging from 0.4% to 3.1%. In stark contrast, the rupee has depreciated by 2.3% during this period, indicating a troubling trend for the Indian currency.
Factors Influencing the Rupee’s Undervaluation
The rupee’s depreciation is largely attributed to persistent foreign capital outflows, which have overshadowed domestic economic fundamentals. According to the Reserve Bank of India’s REER indices, the rupee’s value against a basket of 40 currencies stood at 97.47 in October, remaining below the parity mark of 100. This marks a continued undervaluation since August, following a brief period of marginal overvaluation in July when the index reached 100.03. The SBI research report noted that the rupee’s decline of approximately 10% since April 2023 has led to the REER hitting a seven-year low of 97.40 in September 2025, reflecting a softer currency and lower inflation.
Comparative Performance with Other Asian Currencies
The rupee’s performance is particularly notable when compared to other Asian currencies, many of which have faced steeper declines. The South Korean won, for instance, has weakened significantly due to an export slowdown and revised growth forecasts. Similarly, the Taiwanese dollar has suffered following a substantial equity sell-off, while the Japanese yen has also depreciated amid economic uncertainties. The REER remaining below 100 while the rupee weakens against the dollar is indicative of the current economic landscape, suggesting that while the undervaluation may enhance India’s export competitiveness, it simultaneously poses inflationary pressures.
Implications for the Indian Economy
The ongoing undervaluation of the rupee has mixed implications for the Indian economy. On one hand, a weaker rupee can boost export competitiveness, making Indian goods more attractive in international markets. On the other hand, it raises concerns about inflation, as imported goods become more expensive. The RBI’s REER data indicates that the rupee has been undervalued for three consecutive months, a trend that could have lasting effects on economic stability and growth. As the global economic landscape continues to evolve, the Indian government and financial authorities will need to monitor these developments closely to mitigate potential risks associated with currency fluctuations.
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