Real Exchange Rate

Beyond the headline rate

The number you see quoted — say ₹95 per dollar — is the nominal exchange rate. It does not tell the whole story, because it ignores inflation. If India's prices rise faster than its trading partners', Indian goods become more expensive abroad even if the nominal rate never moves. The real exchange rate corrects for this, adjusting the nominal rate for inflation differences between countries. It measures the *true* relative price of goods across borders — and therefore how competitive a country's exports really are.

India's REER

The RBI publishes a trade-weighted Real Effective Exchange Rate (REER) index against a basket of 40 currencies. The index is set so that a reading above 100 means the rupee is overvalued in real terms, and below 100 means undervalued.

The recent swings are instructive. In late 2024, the REER climbed to a record near 108, implying the rupee was roughly 8% overvalued — the most stretched in about two decades. Indian goods had become expensive abroad in real terms, even though the nominal rupee looked stable. Then through 2025 the picture reversed: the REER fell below 100, reaching about 99 by mid-2025, flipping the rupee to slightly undervalued for the first time in years.

What drove the reversal

The key driver was inflation. With India's inflation running *below* that of several major trading partners, the real value of the rupee fell even while the nominal rate barely moved. Lower relative inflation made Indian goods cheaper in real terms, improving competitiveness automatically.

Why it matters

The real exchange rate explains why the nominal rate alone can mislead. An exporter benefited as the REER slid from about 108 to 99: Indian products became cheaper abroad in real terms even though USD/INR hardly budged — a competitiveness boost invisible in the headline rate. For policymakers, an overvalued REER is a warning that exports may struggle and the rupee may be due to weaken. For investors, watching the REER alongside the nominal rate gives a truer read on India's trade competitiveness and the underlying pressure on the currency than the daily quote ever could.