Decreased value of rupee
The ongoing tension in the Middle East has weakened the Indian rupee considerably. The value of the Indian rupee against other major currencies, calculated on a trade-weighted basis, has fallen to its lowest in more than a decade. The main reason for this is the sharp increase in crude oil prices due to the Iran war and withdrawal of money by foreign investors. The latest bulletin of the Reserve Bank of India released late on Thursday night showed that the 40-currency real effective exchange rate of the South Asian currency, which shows the difference in inflation between different countries, has fallen to 92.72.
The Real Effective Exchange Rate (REER) is now well below its long-term average of 98.25, indicating a much lower value of the rupee compared to earlier levels. Experts say that the decline in inflation in India has put pressure on REER in recent months, which has further increased the rupee’s decline of about 4.5% so far this year. At the end of March, the rupee had reached a record low of 95.21 per dollar.
Currency will improve soon
Despite such a low value of the rupee, experts see little hope of a quick recovery. Experts at BofA Global Research said that the rupee is very cheap in terms of REER, but may remain under pressure due to increase in demand for dollar, increase in oil imports and investors withdrawing money from the stock market due to risk aversion. The March reading represents a decline of about 15 points from the late-2024 high, one of the sharpest declines in many years.
A weak real effective exchange rate makes India’s exports cheaper and more competitive, while imports become more expensive. This also gives foreign investors an opportunity to invest cheaply, even if the value of their existing investments reduces in terms of foreign currency. A small 6-currency index also shows that the rupee’s undervalue is more clearly visible. The 6-currency REER fell to 89.61 in March, the lowest since April 2015 and well below its average of around 100. According to Trade Ministry data, America, China, UAE, Russia, Saudi Arabia and Singapore were India’s largest trade partners in 2024-25.
Also read- Why is Maach-Bhaat important for Bengal? contributes so much to the state’s GDP
