The rupee’s ongoing depreciation, fueled by geopolitical tensions and sustained capital outflows, keeps it trading in an undervalued zone. The real effective exchange rate (REER) fell further to 92.72 in March from 93.99 in February, the lowest level in 12 years, the Reserve Bank of India’s latest bulletin showed.
REER is a weighted index that compares a country’s currency against a basket of 40 foreign currencies, adjusted for inflation. A REER close to 100 indicates that the rupee is fairly valued.
In March 2025, REER stood at 101.72. Since August 2025, REER has stayed below $100, declining monthly.
The rupee has been under consistent pressure in FY26, falling 10.96% in FY26—its sharpest drop in 14 years—making it Asia’s worst-performing currency. The year witnesses external shocks from Trump’s tariff threats to the Middle East crisis, driving record FPIs outflows. March saw the steepest drop—over 4.2%—triggered by the West Asia war outbreak.
External Shocks
“The further fall in REER is fuled by war-led depreciation. The higher oil prices consistently pressured the currency since March, with the onset of the West Asia war. The current undervaluation benefits exporters and will draw investors now, given some clarity regarding the war,” said Anindya Banerjee, Head of Currency and Commodity Research at Kotak Securities.
In the six-currency basket, REER was 91.23 in March compared to 92.45 in February. Market participants anticipate the rupee’s undervaluation persisting for some time, given no clarity over US-Iran peace talks.
“Structural shifts mean the rupee may not rebound sharply. Capital flows remain weak as India is not being heavily favoured at the moment. Oil prices above $100 and softening services exports will exert more pressure on current account. Therefore, the undervaluation will likely remain for a while until we see a reversal in capital flows,” said Dhiraj Nim, economist & FX strategist, ANZ Bank.
“I didn’t have this view a few quarters back, but now I see capital flows as a structural issue.” Nim added that this could warrant government measures to lure foreign portfolio investors.
In FY26, foreign portfolio investors (FPI) offloaded record equities worth $19.3 billion. Though FPIs are net buyers in government securities, the sell-off accelerated with the outbreak of the war. FPIs recorded their highest-ever selling of debt at Rs 17,688 crore in March.
“The current undervaluation is more a reflection of global macro adjustments and terms of trade pressures rather than a misaligned currency. A sustained improvement in capital flows and easing crude prices would be key for any meaningful appreciation bias in the rupee going forward,” said V R C Reddy, head of treasury, Karur Vysya Bank.
Structural Capital Shifts
Nim believes that the rupee depreciation will be more calibrated now, with the RBI measures. “I expect the rupee close to 96 by the year end if oil prices stay elevated.”