The Real Effective Exchange Rate (REER) Advantage
The rupees REER at the end of April 2026 was at 89.7 as per RBI’s data. It is estimated to have slopped below 88 when USD INR breached 96.9 on 20th May 2006.
To put this in perspective, this is the most competitive the currency has been outside of two major structural crises. The 2013 twin deficit crises (driven by crude oil sustaining above $ 100 for three consecutive years) and 2008 Global financial crises.
On a trade – weighted basis , the currency is fundamentally undervalued creating strong margin of safety.
Decades – Low Inflation differentials
Indias inflation differential with the US is at one of its narrowest levels in modern history. Historically this spread averaged around 3.5% to 4% Today, comparing Indias core CPI with US core PCE, a highly stable comparative metric, shows this gap has compressed drastically to the 1% to 2% range.
Balance of Payment Resilience
Current anxieties surrounding Indias BOP are driven less by actual realized external stress and more by expectations of a permanent crude oil reset above $ 120 per barrel. Unless oil permanently anchors at those elevated levels, the BOP weight face pressure but it should avoid the severe distress seen from 2011 to 2013.
Indias structural buffers are Massively under appreciated.
Valuation comfort in Large Caps
Foreign portfolio Investment (FPI) and foreign Direct investment (FDI) flows have been muted, largely a consequence of high aggregate valuations in Indian Equities. But beneath the headline indices, the large cap segments, which traditionally absorbs over two – thirds of net FPI purchases has quietly derated several heavy weights are now trading below their long-term average multiples select Equity segments are available below 15X forward earnings with some valuations dipping to covid or GFC lows. This valuations comfort is highly likely to place floor under FPI selling, especially since underline business quality remains pristine. Generating returns on Equity (ROE) upwards of 18% to 20% is rarity in emerging markets. Yet to tier businesses continue to deliver it. So Indian large cap particularly top 10 (market capitalizations) looks very attractive.
The Cyclical Nature of FX Reserves
The RBI’s headline FX reserves hare declined by $ 29 billion this year. Accompanying this is apprehension regarding the outstanding USD forward book, which stands at roughly 13% of total reserves, potentially reducing usable liquidity while this warrants observations it is not anomaly. The forward book was at 14% in march 2025 And 11% in march 2013. The RBI actively manages this tool across cycles even a net forward purchase position of 11% back in March 2022.
Currencies,interests Rates and flows are inherently cyclical. Betting against rupee at these depressed REER levels and tight inflation differentials is a low probability trade. Conversely the data suggests it is time to allocate towards Rupee denominated assets across both equities and bonds.
Blog by Mr.Santosh G Akerkar for educational and knowledge purposes only.
