The Indian rupee's valuation versus major currencies has fallen to its lowest level in more than a decade, according to the Reserve Bank of India's latest bulletin released on Thursday. The currency's 40-currency real effective exchange rate (REER) declined to 92.72, falling well below its long-run average of 98.25, indicating a deeply undervalued rupee against historical norms. This marks a roughly 15-point decline from late-2024 highs, representing one of the sharpest real depreciation episodes in recent years. As per Reuters, the South Asian currency's 40-currency real effective exchange rate, which accounts for inflation differentials between different economies, fell to 92.72, showing the extent of the rupee's undervaluation. The March reading caps a roughly 15-point decline from late-2024 highs, marking one of the sharpest real depreciations episodes in years.
The rupee's decline has been driven by the Iran war-driven surge in crude oil prices and significant foreign portfolio outflows. The currency hit a record low of 95.21 per dollar in late March, with the rupee experiencing a roughly 4.5% year-to-date decline. Relatively subdued inflation in India has weighed on the REER in recent months, adding to the impact of the rupee's significant depreciation. A narrower six-currency gauge shows the rupee's undervaluation is even starker, with the 6-currency REER declining to 89.61 in March, the lowest on record since April 2015 and well-below the series average of nearly 100. According to Reuters, while the rupee is highly undervalued on REER basis relative to historical ranges, it is likely to remain under pressure in the near term due to dollar demand from ramp-up in oil imports to secure supplies and sizeable equity outflows amid heightened risk aversion.
February 2026 marked a significant inflow of net FDI, reaching ₹4.62 billion—the highest monthly amount in nearly four years. This rebound contrasted sharply with the six preceding months of outflows, driven by a landmark interim trade agreement with the United States. The agreement eliminated a 25% U.S. penalty tariff, reduced reciprocal tariffs to 18%, and included India's commitment to purchase ₹500 billion in U.S. energy, industrial, and technology products over five years. Gross FDI inflows climbed to ₹8.98 billion that month, with foreign investor repatriations falling to ₹1.74 billion, the lowest since September 2020. However, this optimism was short-lived as U.S. and Israeli military actions against Iran dramatically shifted global risk sentiment. In March 2026, a sharp reversal occurred, with FPIs withdrawing $13.6 billion from Indian financial markets. The overall net FPI sales for FY2025-26 reached a record ₹16.59 billion, with the rupee falling past ₹94 per dollar by April 23, 2026, its weakest in over three weeks.
Asian currencies faced unprecedented pressure as the Indonesian rupiah hit a record low of 17,315 per US dollar on Thursday, falling 0.8% in what could be its steepest one-day drop since September 9. The abrupt ouster of influential finance minister Sri Mulyani Indrawati triggered a sharp sell-off, with the currency losing more than 3.5% since the war began in late February, making it the second-worst-performing Asian currency this year after the Indian rupee. Bank Indonesia vowed to go all out to defend the "undervalued" currency and said it stood ready to adjust its policy as necessary to provide stronger support for the rupiah and keep inflation in check. The Thai baht fell to 32.44, its lowest since April 8, while the Philippine peso briefly pared losses after the Bangko Sentral ng Pilipinas (BSP) raised its key interest rate to 4.50% to contain inflation. A minority of 12 out of 26 economists had predicted the BSP would deliver a quarter-point hike, with the currency declining to its intraday low of 60.472 shortly after the rate decision.
Despite the rupee's undervaluation, analysts see limited near-term recovery scope due to continued pressures. According to BofA Global Research, the rupee is likely to remain under pressure from dollar demand from ramp-up in oil imports to secure supplies and sizeable equity outflows amid heightened risk aversion. The Indian central bank has assumed a dollar-rupee exchange rate of 94 in its forecasts for fiscal year 2026-27, with a 5% depreciation from those levels adding about 40 basis points to inflation and 25 basis points to growth per RBI estimates. However, V. Anantha Nageswaran, India's chief economic adviser, told Bloomberg News that the rupee's current valuation provides an attractive entry point for long-term investors. The weaker real-effective exchange rate helps make exports more competitive while increasing import costs, while also offering foreign investors a cheaper entry point to the currency, even while hitting the value of their existing investments in Indian equities and fixed income in foreign currency terms.
