Rupee in Shock Fall! Why India's Currency is Undervalued While Others Soar – Crucial Investor Alert!

The Indian Rupee has experienced a notable decline against the US dollar, slipping from 87.85 in August 2025 to 90.20 by December 2025. This depreciation occurs even as other emerging market countries are registering significant currency gains. Despite this downward trend, analysts suggest the rupee remains fundamentally undervalued.

Rupee's Depreciation and Undervaluation

• The rupee's value against the dollar saw a decline from 87.85 to 88.72 between August and October 2025, continuing its fall to 90.20 in December 2025.
• According to the Reserve Bank of India's (RBI) Real Effective Exchange Rate (REER) indices, the 40-currency basket stood at 97.47 in October 2025, remaining below the 100 parity mark.
• The REER has been below 100 since August 2025, indicating undervaluation, after a brief marginal overvaluation in July when the index touched 100.03.

Driving Factors: Capital Outflows

• The undervaluation is attributed primarily to sustained foreign capital outflows influencing the rupee's movement.
• This is happening despite India's domestic fundamentals remaining sound, suggesting external market dynamics are playing a larger role.

Global Currency Performance Comparison

• Most emerging market currencies have strengthened considerably since August 1st. For example, the South African Rand is up 5%, the Brazilian Real by 3.7%, and the Malaysian Ringgit by 3.4%.
• Currencies in Mexico, China, Switzerland, and the Euro area have also appreciated within a range of 0.4% to 3.1%.
• In contrast, the rupee experienced a 2.3% slide in the same period.
• Other Asian currencies have faced steeper losses or faced challenges. The Korean Won weakened due to an export slowdown and rate cut expectations, while the Taiwan Dollar fell after equity sell-offs and demand concerns. The Japanese Yen softened on economic contraction and ultra-loose policy.

Insights from SBI Research

• SBI Research noted in a report that the onset of a trade war has pulled the REER below 100, with the rupee losing more ground compared to other emerging market currencies.
• Since April 2023, the rupee has declined around 10%, and the REER reached a seven-year low of 97.40 in September 2025.
• SBI research highlights that the RBI REER data as of October 2025 indicates the rupee has been undervalued for the third consecutive month, reflecting a softer currency and lower inflation.

Implications for India

• The continued undervaluation of the rupee, reflected in the REER staying below 100, is consistent with current economic conditions.
• This situation supports India's export competitiveness by making Indian goods and services cheaper for international buyers.
• However, it simultaneously raises concerns about potential inflationary pressures within the domestic economy as imports become more expensive.

Impact

• Impact Rating: 7/10
• The undervaluation of the rupee can significantly impact Indian businesses involved in international trade, making exports more attractive but increasing the cost of imported goods. This dual effect can lead to inflationary pressures, affecting consumer prices and corporate profitability. For investors, currency movements are a key factor influencing foreign portfolio investments and the valuation of Indian equities.

Difficult Terms Explained

• Real Effective Exchange Rate (REER): A weighted average of a country's currency in relation to an index or basket of other major currencies. A REER below 100 suggests the currency is undervalued.
• Parity Mark: In the context of REER, the level of 100 indicates that the currency is neither overvalued nor undervalued against the basket of currencies.
• Foreign Capital Outflows: The movement of money out of a country by foreign investors, typically due to concerns about risk, lower returns, or better opportunities elsewhere.
• Emerging Market Countries: Nations with developing economies that are transitioning towards more advanced market economies, often characterized by high growth potential and evolving regulatory environments.
• Trade War: A situation where countries impose trade barriers, such as tariffs, on each other's imports and exports, often leading to retaliatory measures and impacting global economic stability.