REER confirms undervaluation as rupee weakens to record lows

The real effective exchange rate (REER) for the Indian rupee fell to 97.13 in August, its lowest level since October 2018, as the currency touched a record low of 88.14 against the US dollar.

The rupee’s continued underperformance — the worst-performing currency in Asia — contributed to its undervaluation in REER terms. A REER below 100 indicates that the currency is undervalued, which enhances export competitiveness.

A weaker rupee makes Indian goods and services more affordable in global markets, helping to offset tariff-related pressures faced by exporters.

The REER is calculated as the weighted average of a country’s currency relative to a basket of 40 major currencies, adjusted for infl ation differentials. Since August, the rupee has weakened further to 88.84/$1 in October, driven by geopolitical tensions and trade-related uncertainties. However, the heavy intervention by the Reserve Bank of India (RBI) helped contain the losses and prevented a breach of the 89/$1 level.

Earlier in the year, the rupee had peaked at 102.27 on the REER index in January, when it averaged 86.25/$1. At that time, the currency was overvalued by more than 2%, largely due to sustained RBI interventions aimed at curbing excessive depreciation of the local unit. These interventions across both offshore and spot markets reached a peak of $88.7 billion in February