RBI governor says rupee may be undervalued

The Indian rupee may be undervalued after its sharp decline this year, Reserve Bank of India governor Sanjay Malhotra told Mint, signaling that the central bank sees the recent fall as driven more by external shocks than by a deterioration in India’s economic fundamentals.

In an interview, Malhotra said the rupee was “not overvalued” and may have become undervalued after depreciating about 6% since the outbreak of the Middle East conflict on 28 February.

He said the currency could appreciate once the regional situation normalizes. Reuters separately reported that Malhotra said the RBI would do “whatever is required” to ensure orderly movement in the foreign exchange market.

“With recent depreciation, one could argue that the rupee has become undervalued, both in nominal as well as in REER terms,” Malhotra said, referring to the real effective exchange rate. He said the central bank does not target a specific exchange-rate level but would act to prevent disorderly moves and speculative pressure.

The rupee strengthened on Monday as falling crude prices and hopes of a possible US-Iran peace deal improved sentiment toward oil-importing economies.

The currency rose 0.4% to 95.2775 per dollar, extending gains for a third straight session, after touching a record low of 96.96 last week.

Brent crude fell more than 5% to $97.8 a barrel.

Malhotra’s comments come at a time when India is facing pressure from higher crude prices, capital outflows and disruption to shipping through the Strait of Hormuz.

The strait is one of the world’s most important energy corridors, and the conflict has raised concerns over India’s import bill, current account deficit and inflation outlook.

The RBI governor said India’s current account deficit remains manageable, helped by strong services exports and remittances. He also said the capital account needed improvement, and that foreign direct investment outflows should moderate as equity valuations adjust.

“I expect FDI outflows to moderate, as equity valuations have largely corrected,” Malhotra said in the interview. He said India’s gross FDI inflows have remained strong, with inflows of $0.1 billion in February 2026, compared with $7.5 billion in February 2025.

The governor also sought to distinguish the current episode from the 2013 taper tantrum, when India faced high inflation, a wider current account deficit and more severe external pressure. Malhotra said India is now better placed because inflation is lower, growth remains relatively strong and foreign exchange reserves are substantial.

“Our most recent projections for inflation and growth were 4.6% and 6.9%, respectively. We will be revising the projections, of course, given the evolving conditions,” Malhotra said.

Still, economists say the rupee’s fall cannot be explained only by temporary shocks.

The rupee has depreciated by more than 15% from 83.18 in May 2025 to about 95.8 in May 2026, its sharpest fall since the 2013 taper tantrum, former RBI governor C. Rangarajan and economist N.R. Bhanumurthy wrote in a Mint column on Monday, attributing the drop to large foreign portfolio outflows, a wider goods trade deficit and the impact of the US-Israel war on Iran.

Rangarajan and Bhanumurthy argued that the rupee could recover quickly if the war ends soon, but warned that India must address deeper external vulnerabilities.

They said India’s export diversification has remained weak, unlike China’s, and that the country must work to reduce its current account deficit and improve competitiveness.

The two economists also said India should avoid passing the full burden of the oil shock to consumers. They argued that the government should use excise-duty reductions to absorb part of the increase in crude prices, while keeping a close watch on energy supplies through Hormuz.

Malhotra said the RBI’s main mandate remains inflation control, but added that policy would support growth if inflation conditions allow. The central bank is also seen as having several options to stabilize the rupee, including foreign-exchange intervention, currency swaps, non-resident deposit schemes and possible tax changes for debt investors.