Rupee has fallen and that is not a bad thing

In the past year, the rupee has fallen 5.6 per cent, from 84.7 to 89.7, against the US dollar. It has fallen even more against the euro (9.4 per cent) and the British pound (14.3 per cent), besides also weakening against the Japanese yen and the Chinese yuan over this period. Thus, the rupee has depreciated against all major currencies in nominal terms. And given the current low consumer price inflation in India — below even that in the US, UK, Eurozone or Japan — there has been a decline in the rupee’s real effective exchange rate (REER) too. The Reserve Bank of India’s (RBI) data shows the REER index dipping from an all-time high of 108.1 in November 2024 to 97.5 in October 2025. In other words, the rupee has moved from being a highly overvalued to an undervalued currency today.

That’s not a bad thing from a foreign trade standpoint. India’s merchandise trade deficit touched a record $41.7 billion in October. In a scenario of twin shocks — from US President Donald Trump’s unilateral tariff actions and the Chinese response in the form of an aggressive redirection of its exports to the rest of the world — an artificially strong rupee is the last thing the economy needs. If anything, a slightly undervalued currency, which India now has, would help boost exports and also mitigate the threat from a flood of cheap Chinese imports. Exchange rates are an effective shock absorber and a better tool to correct trade imbalances and improve competitiveness than tariffs and subsidies. Indian policymakers have in the recent past relied on a combination of overvalued exchange rate and retrograde trade measures, from tariffs and export bans to quality control orders, to control inflation and protect domestic industry.

That approach, mercifully, has changed. The RBI, under the current governor, has adopted a more flexible exchange rate policy, letting the rupee float in a calibrated manner. The willingness to allow steady depreciation has been partly on account of easing inflation: The fear of a weaker rupee raising the cost of imports and pushing up domestic prices has receded due to general global deflationary pressures. But a bigger driver, probably, has been the Trump tariffs and the prospect of a China Shock 2.0 from that country exporting its excess industrial capacity. India has a current account deficit problem arising from a growing mismatch between exports and imports that cannot be left unaddressed for too long. The exchange rate policy has to adjust to this reality.

Overall Analysis

The editorial argues that the recent depreciation of the rupee should not be viewed negatively. Instead, it explains how a weaker currency can support India’s trade competitiveness, especially in a time of global economic uncertainty. The article begins with data: the rupee has weakened against major global currencies, both in nominal terms and in real effective exchange rate (REER). By highlighting the fall in REER, the writer stresses that the rupee is now undervalued rather than overvalued, which can be advantageous for exports. The tone here is factual and analytical, relying on numbers to build credibility.

In the second part, the writer connects currency depreciation to global trade challenges. The US tariff actions under Donald Trump and China’s aggressive export push are referred to as “twin shocks”. Against this backdrop, an artificially strong rupee would worsen India’s trade deficit. The editorial argues that an undervalued currency strengthens exports and protects domestic industries from cheap imports. The language becomes more persuasive here, urging policymakers to understand the economic logic instead of depending on protectionist measures such as tariffs and export bans.

The final paragraph praises the RBI for adopting a flexible exchange rate policy. It explains that allowing the rupee to depreciate has been made easier due to lower inflation and global deflationary trends. The article also frames currency strategy as a necessary response to India’s widening current account deficit. The tone becomes slightly cautionary, indicating that India cannot ignore structural trade imbalances. The concluding message is that a realistic exchange rate policy is more effective than interventionist trade measures. Throughout the editorial, the language is technical yet accessible, using economic reasoning to justify why rupee depreciation is not harmful but rather essential in the current global context.

Important Vocabulary (5 words)

1. Depreciated – Reduced in value relative to another currency.
2. Real Effective Exchange Rate (REER) – A weighted index showing a currency’s value against major trading partners after adjusting for inflation.
3. Overvalued – Priced too high compared to its real market worth.
4. Deflationary – Related to a decrease in the general price level of goods and services.
5. Calibrated – Carefully adjusted or managed in controlled steps.

Conclusion & Tone

The editorial concludes that India should welcome — not fear — the rupee’s depreciation. A weaker rupee improves export competitiveness, shields domestic industry from global shocks, and helps correct the trade deficit. The RBI’s flexible policy is portrayed as timely and sensible.

Tone: Analytical, pragmatic, and mildly cautionary, with a supportive stance toward the RBI’s exchange rate strategy.