Rupee below 90: Why an undervalued real exchange rate is a double-edged sword

Subscribe to enjoy similar stories. The rupee has surpassed the 90 per dollar mark, down over 5% from the start of 2025. While the exchange rate has depreciated quite a bit this year, the most recent trigger was the 12% year-on-year contraction in exports for the month of October, driven mainly by a decline in exports to the US.

Markets are spooked by fears that high tariffs have started hurting shipments to India’s largest export market. The good news is that a weaker rupee makes Indian exports cheaper in dollar terms, which offsets some of the damage caused by US tariffs. Even better, this time, the falling nominal exchange rate has been accompanied by falling inflation differentials between India and the US.

Consumer price inflation in India has dropped to sub-1% levels, while US inflation appears to have stabilized at 2-3%. That’s a double boost for exports: prices are lower in India, and its currency is weaker. The result is that for an American buyer, a basket of Indian goods is cheaper than before.

For Indians, though, it costs more to buy a basket of American goods. In other words, the rupee is undervalued against the dollar in real terms. “Real undervaluation" means that the loss of value for the rupee is the result of both nominal depreciation and relative prices.

An undervalued real exchange rate makes Indian exports more competitive in real terms, but it also makes imports more expensive. Since India trades with many countries, it is useful to look at multi-currency real effective exchange rates (REER) estimated by the Reserve Bank of India—in fact, they also show undervaluation. It is important to assess the impact of changes in the real exchange rate on both exports and imports for two reasons.