Indian rupee remains overvalued despite improving trends

In January, India's foreign direct investment (FDI) fell by 13% to $5.8 billion. This came as foreign portfolio investments experienced a net outflow of $6.6 billion, following a positive inflow of $1.7 billion in December. Despite this monthly decline, total inward FDI remained strong, showing a year-on-year growth of 12.4% to reach $67.7 billion for fiscal year 2025. During the same period, net FDI dropped to $1.4 billion compared to $11.5 billion earlier. This decline is attributed to increased repatriation and outward investments from India. On the other hand, outward remittances under the Liberalised Remittance Scheme rose to $2.8 billion in January, an increase from $2.3 billion the previous month. Although the rupee has depreciated, it is still considered overvalued. According to the Reserve Bank of India (RBI), the real effective exchange rate (REER) indicates that the rupee is overvalued by 2.4%. The REER for February was reported at 102.37, improving from 108.14 in November. This suggests that the rupee is moving closer to its fair value. Additionally, the RBI has been intervening in the currency market less frequently in January, which may indicate a change in its strategy.