Rupee has fallen and that is not a bad thing, Pg10

Key Highlights:

• The rupee has depreciated by 5.6% against the US dollar, 9.4% against the euro, and 14.3% against the British pound over the past year.
• India's Real Effective Exchange Rate (REER) has decreased from 108.1 in November 2024 to 97.5 in October 2025, indicating the rupee has moved from overvalued to undervalued.
• India's merchandise trade deficit reached $41.7 billion in October.
• The Reserve Bank of India (RBI) has adopted a more flexible exchange rate policy, allowing the rupee to float in a calibrated manner.

Detailed Insights:

• The rupee's depreciation against major currencies is due to global deflationary pressures and the prospect of increased exports from countries like China.
• An undervalued rupee can help boost exports and mitigate the threat of cheap imports, acting as a shock absorber for the economy.
• The RBI's shift towards a flexible exchange rate policy is influenced by easing inflation and the need to address the current account deficit.
• Previous policies relied on overvalued exchange rates and trade measures like tariffs and export bans, which have now been replaced by a more flexible approach.
• The change in approach is aimed at correcting trade imbalances and improving competitiveness in the face of global economic challenges.

Key Concepts Involved:

• Real Effective Exchange Rate (REER): A weighted average of a country's currency relative to an index or basket of other major currencies, adjusted for the effects of inflation.
• Current Account Deficit: The shortfall when a country's total imports of goods, services, and transfers is greater than its total exports.
• Exchange Rate Policy: Actions undertaken by a monetary authority to manage the exchange rate between its currency and other currencies.