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The rupee has weakened significantly over the past year, falling from 84.7 to 89.7 against the US dollar. Its depreciation has been even sharper against the euro (9.4 per cent) and the British pound (14.3 per cent). It has also lost value against the Japanese yen and the Chinese yuan. In nominal terms, therefore, the rupee has depreciated against all major global currencies.

This depreciation comes at a time when price inflation in India is low — lower than inflation in the US, the UK, the Eurozone, and Japan.

The rupee’s Real Effective Exchange Rate (REER) has also declined. Reserve Bank of India data shows the REER index falling from an all-time high of 108.1 in November 2024 to 97.5 in October 2025. In other words, the rupee has shifted from being overvalued to being undervalued.

From a foreign trade perspective, this shift is not necessarily negative. India’s merchandise trade deficit reached a record $41.7 billion in October, in the backdrop of twin global shocks: US President Donald Trump’s unilateral tariff actions and China’s aggressive redirection of its exports toward the rest of the world.

In such a scenario, an artificially strong rupee is the last thing the economy needs. A mildly undervalued currency, as India now has, can help boost exports and cushion the domestic market from a surge of cheap Chinese imports. Exchange rates serve as effective shock absorbers and are often better tools for correcting trade imbalances and improving competitiveness than tariffs or subsidies.

In recent years, Indian policymakers relied on a mix of an overvalued exchange rate and protectionist trade measures — including tariffs, export bans, and quality-control orders — to control inflation and shield domestic industries. That approach has shifted. Under the current governor, the Reserve Bank of India has adopted a more flexible exchange-rate policy, allowing the rupee to move in a more calibrated manner.

The willingness to permit steady depreciation partly stems from easing inflation. The earlier fear that a weaker rupee would make imports costlier and fuel domestic prices has receded amid global deflationary pressures. A bigger factor, however, may be the shock from Trump’s tariffs, combined with China’s export surge driven by excess industrial capacity.

India’s current account deficit, rooted in a widening gap between exports and imports, cannot remain unaddressed indefinitely. Exchange-rate policy must adapt to this reality.