The Indian rupee’s valuation against major global currencies has dropped to its lowest level in more than a decade, weighed down by rising crude oil prices and persistent foreign outflows.
Data from the Reserve Bank of India’s latest bulletin showed that the rupee’s 40-currency real effective exchange rate (REER) fell to 92.72.
The REER adjusts for inflation differentials and is widely used to assess a currency’s competitiveness.
The latest reading places the rupee significantly below its long-term average of 98.25, indicating that the currency is deeply undervalued compared to historical levels.
1. Oil price surge amid Iran war pressures rupee
A sharp rise in crude oil prices, driven by the Iran war, has emerged as a key factor weighing on the rupee.
Higher oil prices increase India’s import bill, leading to stronger demand for dollars and putting downward pressure on the local currency.
Analysts noted that oil-related dollar demand has intensified as importers ramp up purchases to secure supplies.
2. Foreign portfolio outflows add to currency weakness
Heavy foreign portfolio outflows have further weakened the rupee.
Investors have pulled money out of Indian equities amid heightened global risk aversion and increasing demand for the US dollar.
As mentioned in a Reuters report, Analysts at BofA Global Research said the rupee is likely to remain under pressure due to “dollar demand from ramp-up in oil imports to secure supplies and by sizeable equity outflows amid heightened risk aversion.”
3. Weak inflation drags real exchange rate lower
Relatively subdued inflation in India has also contributed to the fall in REER.
Lower inflation reduces the relative price level advantage, pulling down the trade-weighted valuation of the currency.
This factor has compounded the impact of the rupee’s approximately 4.5% decline so far this year, as cited in a Reuters report.
4. Sharp depreciation trend since late 2024
The March REER reading caps a steep decline of nearly 15 points from late-2024 highs, marking one of the sharpest episodes of real depreciation in recent years.
The rupee also hit a record low of 95.21 per dollar in late March, highlighting the sustained pressure on the currency.
5. Broader trade-weighted measures signal deeper undervaluation
A narrower six-currency REER gauge shows an even steeper decline.
The index dropped to 89.61 in March, its lowest level since records began in April 2015, and well below its long-term average of nearly 100.
India’s six largest trading partners during the 2024–2025 fiscal year included the US, China, the United Arab Emirates, Russia, Saudi Arabia, and Singapore, according to trade ministry data.
Limited recovery outlook despite undervaluation
Despite the rupee appearing undervalued, analysts see limited scope for a near-term rebound.
Persistent dollar demand and global uncertainties are expected to keep the currency under pressure.
At the same time, a weaker REER improves export competitiveness and makes Indian assets cheaper for foreign investors, though it reduces the value of their existing investments in foreign currency terms.
The Reserve Bank of India has assumed an exchange rate of 94 per dollar in its projections for fiscal year 2026–27.
A 5% depreciation from this level could add about 40 basis points to inflation and 25 basis points to growth, as per RBI estimates.
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