Rupee has fallen and that is not a bad thing

In the past year, the rupee has fallen 5.6 per cent, from 84.7 to 89.7, against the US dollar. It has fallen even more against the euro (9.4 per cent) and the British pound (14.3 per cent), besides also weakening against the Japanese yen and the Chinese yuan over this period. Thus, the rupee has depreciated against all major currencies in nominal terms. And given the current low consumer price inflation in India — below even that in the US, UK, Eurozone or Japan — there has been a decline in the rupee’s real effective exchange rate (REER) too. The Reserve Bank of India’s (RBI) data shows the REER index dipping from an all-time high of 108.1 in November 2024 to 97.5 in October 2025. In other words, the rupee has moved from being a highly overvalued to an undervalued currency today. That’s not a bad thing from a foreign trade standpoint. India’s merchandise trade deficit touched a record $41.7 billion in October. In a scenario of twin shocks — from US President Donald Trump’s unilateral tariff actions and the Chinese response in the form of an aggressive redirection of its exports to the rest of the world — an artificially strong rupee is the last thing the economy needs. If anything, a slightly undervalued currency, which India now has, would help boost exports and also mitigate the threat from a flood of cheap Chinese imports. Exchange rates are an effective shock absorber and a better tool to correct trade imbalances and improve competitiveness than tariffs and subsidies. Indian policymakers have in the recent past relied on a combination of overvalued exchange rate and retrograde trade measures, from tariffs and export bans to quality control orders, to control inflation and protect domestic industry.