The Indian Rupee (INR) has entered a phase of recalibrated valuation, as the Reserve Bank of India’s (RBI) June 2025 bulletin reports a Real Effective Exchange Rate (REER) of 100.36, huge shift from 105.28 in March and 101.12 in May.
A REER close to 100 signals that the rupee has transitioned from an overvalued zone into fair value territory. REER is a weighted index that compares a country’s currency against a basket of 40 foreign currencies, adjusted for inflation.
Rupee performance
Despite this adjustment, the rupee has emerged as the worst-performing currency among its Asian peers, shedding 1.23% since the beginning of April and 1.06% since January 2025. The Hong Kong dollar is the only other currency apart from the rupee that has lost this financial year. Meanwhile, on Friday, the rupee continued to remain weak for the eight consecutive session to end at a one month low of `86.52 against the US dollar. From July 16 to July 25, the rupee lost 58 paise or 0.7% due to consistent outflow of foreign funds from the domestic capital market.
Currency strategists suggest this under-performance has helped maintain the rupee’s fair valuation in global terms. RBI’s tactical intervention in the forward market has played a central role. In two months, between April and May 2025, the central bank reduced its net forward book by $20 billion from $84 billion to $65 billion, signaling a strategic unwinding of its long dollar positions. While in the spot market in May, the RBI net purchased $1.7 billion. It bought $9.1 billion and sold $7.3 billion in the spot market.
Analyst’s POV
Analysts believe this shift weighed heavily on the INR. By balancing a large short position and opportunistically buying dollars, the RBI has allowed the rupee to slide while containing volatility.
“In a fractured world with bilateral trade tensions, RBI plays both sides of the market,” said Anindya Banerjee, head of currency & commodities at Kotak Securities. “They absorb dollars during heavy selling and intervene during appreciation to protect exporters.” Banerjee projects INR to remain range-bound between `85 to `87 against the dollar, barring major equity outflows or geopolitical disruptions.
Adding to the pressure is the lack of clarity around the US-India trade deal and sluggish capital inflows. Gaura Sengupta, chief economist at IDFC Bank, stated that RBI’s negative forward book continues to anchor INR depreciation. “We expect USD/INR to rise to 87.25 by March 2026,” she stated.
With the rupee depreciating significantly, improving its FX competitiveness, Mitul Kotecha of Barclays Bank, in its FX Strategist report, said, “The RBI might pause its USD buying amid recent INR weakness.” While the rupee may be fairly valued in macroeconomic terms, its relative weakness among Asian currencies and RBI’s calibrated interventions indicate a fragile balance. In the short term, INR is expected to navigate global uncertainties and bilateral trade negotiations, with RBI’s dual strategy steering it through choppy waters.