Rupee Hits 12-Year Undervaluation Low, Export Impact Uncertain

India's Rupee Hits 12-Year Low, Weakening Export Competitiveness

India's rupee has depreciated to its weakest level against a basket of currencies in nearly 12 years, touching 95.2 per dollar in May compared to 85.58 in May 2024. This sharp depreciation may offer little relief to exporters and could instead widen the trade deficit, according to a Moneycontrol analysis and a recent study by the Export-Import Bank of India.

The Rupee's value against a basket of currencies, measured by the Real Effective Exchange Rate (REER), has declined 11.2 percent over the past year. However, the relationship between REER and export competitiveness has weakened due to India's heavy dependence on imported inputs, including oil and gold. Until March, the rupee declined 9 percent against the basket of six currencies, and it is set to dip further with the currency depreciating 0.4 percent since then.

Merchandise exports rose modestly to $43.6 billion in April 2026 from $38.3 billion a year earlier, while imports surged to $71.9 billion from $65.4 billion, keeping the trade deficit elevated. An Exim Bank study released in April 2025 found that the import intensity of raw materials used in Indian manufacturing stood at 33.4 percent in FY23, while 56.2 percent of India's merchandise exports came from industries with import dependence exceeding that average.

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The study found that a 1 percent increase in REER, indicating rupee appreciation, could boost India's real exports by 1.07 percent in the long run, a finding that runs counter to the traditional assumption that depreciation supports exports. Raw materials and intermediate goods comprise nearly two-thirds of India's total imports in 2024, only slightly lower than 65 percent a decade ago and 69 percent in 2009.

The weakening currency also magnifies the burden of India's import bill, particularly for commodities such as crude oil, gold, and electronics. Crude oil, gold, and fertilisers accounted for $240 billion or nearly a third of India's total imports in FY26. With global crude prices remaining elevated amid tensions in West Asia, the pass-through from currency depreciation to domestic costs could intensify pressure on inflation and the current account.

Brent crude traded around $111 per barrel on Wednesday, further exacerbating the situation. Rather than boosting exports, the rupee's slide may raise the cost of imported raw materials for precisely those industries that account for the majority of the country's exports.

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The Exim Bank study also found that global demand matters far more than exchange rate movements. A 1 percent increase in world GDP was estimated to raise India's exports by 4.15 percent, underscoring that external demand conditions remain the dominant driver of export growth. The UN on Tuesday predicted the global economy to grow 2.5 percent in 2026, down from 3 percent for the previous year, due to the West Asia crisis.