Real Effective Exchange Rate Hits 7.5-Year High, Rupee Now Even More Overvalued

Pakistan’s Real Effective Exchange Rate (REER) rose to 105.17 in March 2026, up from 103.11 in February, marking a 2 percent month on month increase and the highest level since September 2018, according to market data based on State Bank of Pakistan figures and Arif Habib Limited Research.

REER is a broader measure of the rupee’s strength against the currencies of Pakistan’s major trading partners, after adjusting for inflation differences.

A reading of 100 is often treated as a reference point. When the REER moves above 100, it generally suggests that the rupee is becoming relatively overvalued compared to peer countries.

This means Pakistan’s exports can become less competitive globally because local goods become more expensive in relative terms, while imports may become comparatively cheaper.

Latest reading suggests rupee’s inflation-adjusted value is now around 5 percent stronger than the base benchmark, which can put pressure on export-led sectors such as textiles, leather, surgical goods, and IT-enabled services.

REER had already been above 100 for several months, and the latest jump takes it to the highest level in nearly seven and a half years. On a trend basis, the index is now up 7.28 percent in fiscal year 2026 to date and 1.56 percent in calendar year 2026, indicating sustained appreciation in the rupee’s relative value.

Rising REER can be a double-edged sword. It can help contain imported inflation, especially for commodities like oil, machinery, and food inputs but it can also hurt Pakistan’s export competitiveness and current account sustainability if the gap remains elevated for too long.