Why the Rupee’s Fall Is ‘Real’ This Time

The rupee’s fall in 2025 has raised serious questions about India’s currency stability. The exchange rate slipping past ₹89.46 per US dollar marks a record low, but the worrying part is that the rupee’s decline isn’t limited to the dollar. It has dropped against the euro, British pound, and Japanese yen, making this fall more broad-based and severe.

To understand why the rupee’s fall is ‘real’ this time, economists recommend examining India’s Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER)—two indicators that better reflect true currency strength.

Rupee Weakens Across All Major Global Currencies

Between November 2024 and November 2025, the rupee recorded sharp declines:

This shows that the rupee has weakened more against the euro and pound than against the U.S. dollar.

Understanding NEER and REER

A headline exchange rate never gives the full picture. That’s why NEER and REER are used globally.

1. Nominal Effective Exchange Rate (NEER)

NEER compares the rupee against a basket of 40 major trading partner currencies.

• A NEER below 100 means the rupee is weaker than its 2015–16 base year.

• In October 2025, NEER plunged to 84.58, showing steep nominal depreciation.

2. Real Effective Exchange Rate (REER)

REER adjusts NEER for inflation differences between India and other countries.

• If India’s inflation is higher than others → rupee becomes overvalued.

• If inflation is lower → rupee becomes undervalued.

This makes REER the truest measure of the rupee’s real worth.

Why the Rupee’s Fall Is ‘Real’ This Time

Between November 2024 and October 2025, India’s REER fell from 108.06 to 97.47, marking a shift from an overvalued to an undervalued currency.

This happened mainly due to:

1. Broad-Based Global Weakness

The rupee has weakened not only against the U.S. dollar but also against:

• Euro

• Yen

• Pound

• Chinese Yuan

This broad decline is a sign of structural depreciation, not temporary volatility.
This matches several Rupee fall 2025 trends captured in NEER India and REER India indices.

2. India’s Exceptionally Low Inflation

India’s CPI inflation in October 2025 was only 0.25%, lower than:

• US – 3%

• Japan – 3%

• UK – 3.6%

• Eurozone – 2.1%

• Indonesia – 2.9%

• Brazil – 4.7%

Low inflation makes the rupee’s real depreciation sharper, accelerating REER decline.

IMF’s “Crawl-Like Arrangement”: What Does It Mean?

In November 2025, the IMF reclassified India’s exchange rate regime as a crawl-like arrangement.

This means:

• The rupee is neither completely floating nor tightly controlled.

• It is allowed to adjust gradually within a band.

• The RBI intervenes occasionally but not aggressively.

This shift reflects a more market-aligned approach to exchange rate management.

Why the RBI Is Allowing More Flexibility

Two reasons explain this policy shift:

1. Lower Domestic Inflation

With inflation under control, India no longer needs to keep the rupee artificially strong to manage import costs.

2. Export Competitiveness

A weaker rupee helps exporters, especially during:

• US tariff uncertainty

• China diverting exports

• Slowing global trade

A controlled depreciation boosts India’s global competitiveness.

Is the Rupee Undervalued Now?

Yes.

With REER below 100, the rupee is now considered undervalued, which helps:

• Boost exports

• Improve trade balance

• Strengthen manufacturing competitiveness

This undervaluation is partly deliberate, aligned with India’s evolving exchange rate strategy.

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Conclusion

The rupee’s fall is real this time because NEER, REER, global inflation trends, and RBI’s evolving exchange rate policy collectively point toward a fundamental shift. India’s currency is now undervalued, making exports more competitive and reflecting a new macroeconomic strategy.

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