Is "Rohan said that he is happy" correct?

Why

Priya's instinct to keep the exact words Rohan said feels like the most faithful, accurate way to report him — repeating his tense exactly as he used it. English reported speech, though, has its own convention: since you're now describing something said in the PAST ("Rohan said..."), every tense inside the reported part typically shifts one step back into the past too, even though Rohan's own tense at the time was present. His present "I am happy" becomes past "he was happy" once it's wrapped inside a past-tense reporting sentence — the shift reflects that you're now speaking from a later point in time, looking back at what he said. Test: notice the same shift happening with other tenses too — "I will come" becomes "he said he would come", and "I have finished" becomes "he said he had finished" — the whole reported sentence moves one step further into the past, together, as a set. Her sister is right: reported speech generally shifts the tense back one step, so Rohan's present "I am happy" is correctly reported as "he was happy".