Rupee Undervalued on REER Basis, Goyal Predicts Rebound

RBI Monetary Policy Committee member Ashima Goyal stated this week that the rupee is undervalued on a real effective exchange rate (REER) basis and positioned for a rebound. The comment comes from a rate-setter who also influences the central bank's currency management approach. For anyone building an INR watchlist, the claim demands a clear-eyed look at what REER actually signals versus what drives the rupee day to day.

REER Undervaluation: The Fundamental Anchor

REER measures the rupee against a basket of trade-partner currencies, adjusted for inflation differences. An undervaluation reading means Indian goods and services are competitively priced abroad. That is a structural positive for exports and a long-run anchor for the currency. On that basis, Goyal sees an eventual recovery toward fair value.

The better market read is that REER is a backward-looking metric that does not trigger immediate flows. Short-term INR direction depends on the dollar index, RBI intervention, and the carry trade. Even if REER signals cheapness, the rupee can stay weak if capital outflows persist or the RBI continues buying dollars to manage volatility. Traders should treat Goyal’s comment as a fundamental backdrop, not a timing signal.

Three Drivers That Override REER for Now

Three factors will determine whether the undervaluation translates into a rebound.

• Dollar strength: The DXY remains the primary external driver. A sustained decline in the dollar index would reduce pressure on INR and validate Goyal’s view. The next US inflation print is the immediate catalyst.
• RBI intervention: The central bank has historically used FX reserves to smooth sharp moves. If the RBI steps back from dollar buying, the rupee could appreciate faster. The next RBI policy statement will signal any shift in intervention posture.
• Carry and capital flows: Indian real yields remain attractive on a risk-adjusted basis. If global risk appetite firms up, foreign portfolio inflows into debt and equity would support the rupee. The India 10-year nominal yield versus US Treasuries is the spread to watch.

For a broader view on how dollar dynamics flow through to EM currencies, see the forex market analysis section. The EUR/USD profile also matters because a weaker euro tends to lift the dollar, putting Asian FX under renewed pressure.

Next Catalyst: RBI Policy and US Data

Ashima Goyal’s REER argument is a medium-term anchor, not a trade trigger. The market’s immediate focus is on the RBI’s next monetary policy decision and the trajectory of US data. If the RBI holds rates steady while the Fed signals cuts, the carry advantage widens – a classic setup for INR gains. Conversely, if the RBI continues aggressive FX intervention to defend an arbitrary level, the undervaluation thesis could take months to play out.

For traders, the concrete test will be the rupee’s reaction to dollar demand near recent intervention zones. A break above those levels without RBI pushback would confirm the momentum Goyal anticipates. Until then, REER is a fact worth knowing but not a reason to chase the move.

For traders tracking Indian equities, the HDB stock page shows an Alpha Score of 41, reflecting mixed sentiment that could shift with rupee direction. The INFY stock page and WIT stock page carry scores of 57 and 46 respectively, indicating moderate to mixed exposure to currency moves.