The rupee's journey: From overvalued to undervalued, Pg16

Key Highlights:

• The Indian Rupee recently breached the 96-to-the-dollar mark due to hardening global oil prices and geopolitical tensions.
• The Reserve Bank of India (RBI) Governor stated that the rupee has become undervalued, contrary to its previous overvalued status.
• The Real Effective Exchange Rate (REER) index, a key measure of currency valuation, fell to 89.08 in May 2026 from over 100 in July 2025.
• The rupee is now considered more competitive than the Chinese Yuan, with its Real Broad Effective Exchange Rate (RBEER) at 90.15 in June 2026 compared to the Yuan's 92.24.

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Detailed Insights:

• The rupee's depreciation is significantly influenced by global oil price fluctuations and hostilities between the US and Iran.
• The Nominal Effective Exchange Rate (NEER) and REER indices measure the rupee's movement against a basket of 40 currencies of India's key trade partners.
• The base year for calculating India's NEER and REER is 2015-16, with a value set at 100 for comparison.
• An REER below 100 indicates undervaluation, while above 100 signifies overvaluation, reflecting the currency's real effective exchange value.
• The Federal Reserve Bank of St. Louis also calculates a similar metric, the Real Broad Effective Exchange Rate (RBEER), using a wider basket of 64 trade partners and a 2020 base year.
• An undervalued rupee can potentially boost Indian exports and enhance the competitiveness of domestic manufacturing.

Key Concepts Involved:

• Nominal Effective Exchange Rate (NEER): A weighted average of a country's currency against a basket of foreign currencies, without adjusting for inflation.
• Real Effective Exchange Rate (REER): The NEER adjusted for inflation differentials between the home country and its trading partners, indicating true competitiveness.
• Federal Reserve Bank of St. Louis: One of the 12 regional Federal Reserve Banks in the United States, providing economic research and data.
• Real Broad Effective Exchange Rate (RBEER): A measure similar to REER, calculated by the Federal Reserve Bank of St. Louis, using a broader set of trade partners.