RBI Governor Says Rupee May Be Undervalued After Depreciation
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
indian-rupeerbi
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Reserve Bank of India Governor Sanjay Malhotra stated the Indian rupee may be undervalued following its recent depreciation in an interview. The comments, made on May 25, 2026, represent a notable shift in rhetoric from the central bank, which has historically focused on curbing excessive rupee volatility. The rupee has weakened approximately 4% against the US dollar over the past quarter, trading near 84.50 prior to the governor's remarks.
Governor Malhotra's statement marks a departure from the RBI's typical communication strategy. Historically, the central bank has avoided making explicit judgments on the rupee's fair value, instead emphasizing its objective to maintain orderly market conditions. The last significant period of rupee weakness occurred in 2022-2023, when it depreciated over 10% to a record low above 83.50, prompting heavy FX intervention from the RBI.
The current macro backdrop includes a strong US dollar and elevated global crude oil prices, which have pressured emerging market currencies broadly. The trigger for the governor's comment appears to be the rupee's persistence near the lower end of its perceived trading band. This public acknowledgment of potential undervaluation suggests the RBI may be growing more comfortable with the currency's level after a sustained period of depreciation, viewing it as a buffer against external shocks rather than a threat to financial stability.
Recent trading data shows the Indian rupee trading at approximately 84.50 per US dollar, a depreciation of roughly 4% from its level of 81.20 three months prior. The rupee's performance lags behind several EM peers; the Mexican peso is down only 1.5% year-to-date, while the Brazilian real has appreciated 2% against the dollar.
| Metric | Current Level | Change (3-Month) |
|---|---|---|
| USD/INR Spot | 84.50 | +3.30 (4.0%) |
| RBI's FX Reserves | $665 billion | +$12 billion (Jan-May 2026) |
| 10-Year G-Sec Yield | 6.95% | -5 bps (week of statement) |
The Reserve Bank of India's foreign exchange reserves stand at $665 billion, having increased by $12 billion since the start of the year. This substantial war chest provides the central bank with significant capacity to influence the exchange rate if it deems necessary. The yield on the 10-year Indian government bond dipped 5 basis points to 6.95% in the week surrounding the governor's comments, indicating market interpretation of a potentially less hawkish stance on currency defense.
The governor's comments have immediate implications for specific sectors. Export-oriented companies like Infosys [INFY] and Tata Consultancy Services [TCS] typically benefit from a weaker rupee, as it increases the rupee-value of their overseas earnings. A shift in rhetoric suggesting the currency is undervalued could cap these gains if it leads to a firmer rupee. Conversely, import-heavy sectors like oil marketing companies such as Indian Oil Corporation [IOC.NS] would see relief from lower domestic fuel costs if the rupee strengthens, reducing their input expenses.
A counter-argument is that the governor's statement is merely verbal intervention and may not signal an immediate policy shift. The RBI's primary mandate remains price stability, and a significantly stronger rupee could dampen inflation too aggressively amid slowing growth. Market positioning data from futures markets shows speculative short positions on the rupee have increased in recent weeks. The governor's comments could trigger a short-covering rally if traders perceive a reduced tolerance for further depreciation from the central bank.
The next key domestic catalyst is the RBI's Monetary Policy Committee meeting scheduled for June 5-6, 2026. The policy statement and subsequent press conference will be scrutinized for any elaboration on the governor's undervaluation remarks and any changes to the central bank's FX intervention strategy. Market participants will monitor whether the RBI allows the rupee to appreciate or continues to accumulate reserves around current levels.
Technical levels to watch include immediate resistance for USD/INR at 84.20, a breach of which could signal a near-term peak, and support at the recent high of 84.80. The direction of global crude oil prices remains a critical external factor; a sustained move in Brent crude above $90 per barrel would likely reassert downward pressure on the rupee. US non-farm payrolls data on June 6 will also influence dollar strength broadly, impacting all emerging market currencies.
An undervalued currency generally makes a country's exports more competitive and increases the local currency value of overseas earnings for multinational corporations. For Indian equities, this is a net positive for the Nifty 50 index, which has a significant weighting in export-oriented IT and pharmaceutical companies. However, it increases costs for companies that rely on imported raw materials, such as those in the energy and chemicals sectors. The overall market impact depends on the balance between these sectoral effects and the signal of central bank support for the economy.
The RBI likely assesses valuation using a range of macroeconomic models, including the Real Effective Exchange Rate (REER). The REER indexes the rupee against a basket of currencies of India's major trading partners, adjusted for inflation differentials. A REER value significantly below 100 suggests the rupee is undervalued. Other factors considered include the current account deficit, inflation trends, and foreign exchange reserve adequacy. The governor's comment suggests internal models may be signaling a deviation from the rupee's long-term equilibrium value.
Yes, the RBI has a long history of two-way intervention. While recent intervention has focused on selling dollars to prevent excessive rupee depreciation, the central bank has also purchased dollars to build reserves and prevent the rupee from appreciating too rapidly, particularly during periods of strong foreign portfolio inflows. For example, during the large inflows of 2020-2021, the RBI bought over $100 billion in the spot and forward markets to temper rupee strength and bolster its reserves, which now stand at $665 billion.
Governor Malhotra's undervaluation comment signals a potential shift in FX policy, suggesting the RBI's tolerance for rupee weakness may be reaching its limit.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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