RBI’s flexible exchange rate management drives INR towards fair value as seen in REER In this note, we look at trends in spot INR, and impact of changes in the central bank’s exchange rate management on fairness in the currency’s value over its peers. As on Feb’25, the REER stood at 102.37- indicating that the INR is only 2% overvalued compared to its major trading partners or peer currencies (as against 8% overvaluation witnessed in Nov’24). The Reserve Bank of India, under the leadership of the new Governor, has allowed the INR to float in resonance with its emerging market peers – exhibiting a more flexible exchange rate management. We expect the currency to trade in a range of 85.50 to 86.50 in the near term, with upside risks seen from further worsening of global risk conditions. The pair was broadly in range for much of the last year (given active RBI intervention), but the pace of depreciation picked up significantly in late 2024. This was matched by a pickup in FX sales in the spot market – driving durable liquidity in deficit zone. The pair was allowed to an all-time high 87.58 in early Feb with weakness in Asian currencies, though this upside did not sustain, with correction in DXY. The weakness in DXY was brought about by fears around an economic slowdown in the US following president Trump’s tariff threats. In addition to this, a series of high frequency indicators in the US point towards weakness in economic activity (reflected from ISM manufacturing PMI, core durable goods orders, contraction in JOLTS job openings and fall in quits, deterioration in consumer confidence) along with still elevated inflation and a sharp rise in inflation expectations. Markets now watch for further evidence of weakness in jobs markets in forthcoming ADP payrolls, and US BLS nonfarm payrolls data this week (this is the most significant labor market indicator).
