Indian rupee still overvalued

In January, total inward foreign direct investment (FDI) fell by 13% from the previous month to $5.8 billion, while foreign portfolio investments saw a net outflow of $6.6 billion, compared to an inflow of $1.7 billion in December. However, total inward FDI remained strong, growing by 12.4% year-on-year to $67.7 billion during FY25 (April–January).

Net FDI declined to $1.4 billion from $11.5 billion in the same period due to higher repatriation and outward FDI from India. Meanwhile, outward remittances under the Liberalised Remittance Scheme (LRS) rose to $2.8 billion in January, up from $2.3 billion the previous month.

Despite the depreciation of the rupee, the local currency remains overvalued in terms of an inflation-adjusted index, real effective exchange rate (REER), which measures its value against trading partners.

The latest figure disclosed by the RBI for February shows that REER stood at 102.37, indicating that the rupee is overvalued by 2.4% relative to its intrinsic value. However, REER has improved from 108.14 in November, suggesting that the local currency is converging towards its fair value.

Meanwhile, the pace of the RBI’s intervention in the currency market slowed in January.