India's Rupee May Be Undervalued Says RBI Governor After 96.96 Low

Reserve Bank of India Governor Sanjay Malhotra issued a rare and direct statement on the rupee's valuation, suggesting the currency is now undervalued after its recent slide and confirming the central bank will use its full arsenal to defend it.

In a significant verbal intervention, the head of India’s central bank said there is reason to believe the rupee is now undervalued after its recent 13% depreciation, signaling a more forceful approach to currency management as the country battles capital outflows and rising inflation. Governor Sanjay Malhotra confirmed the Reserve Bank of India would use all its tools, including its roughly $700 billion in foreign exchange reserves, to ensure stability. The comments come just ahead of the bank's June 5 monetary policy meeting.

"The governor’s open talk on valuation suggests the central bank is leaving no stone unturned to arrest the rupee’s slide amid strong balance-of-payments pressures," Dhiraj Nim, an economist at ANZ Bank, said in a note. He added that this means the RBI's recent actions to defend the currency will likely be sustained.

The rupee fell to a record low of 96.96 against the dollar last week before concerted central bank intervention helped it recover to 95.69 by Friday's close. The pressure stems from significant foreign capital flight, with net outflows from foreign portfolio investors (FPIs) exceeding $22.2 billion since the beginning of January, according to exchange data. The currency has weakened by about 6% year-to-date.

The RBI’s direct commentary aims to calm markets and increase the risk for speculators betting against the rupee. While most economists expect the RBI to hold its key policy rate steady at the June 5 meeting, the central bank is assessing multiple options to stanch the outflows, including potential interest rate hikes and offering dollar financing to overseas investors.

An Unusually Direct Stance

Governor Malhotra’s explicit comments on valuation are a marked departure from the RBI's traditional ambiguity on the currency's fair value. "Given the recent depreciation, it would be reasonable to think that the rupee is not overvalued. If anything, one could argue that the rupee has become undervalued," Malhotra said in a May 25 interview with the Mint newspaper. This follows similar remarks from Chief Economic Advisor V. Anantha Nageswaran, who last month called the rupee "fundamentally undervalued," suggesting a coordinated effort from policymakers to build a floor under the currency.

This type of direct verbal intervention is a core tool for central banks aiming to influence market psychology without deploying reserves. For comparison, the Central Bank of Sri Lanka, operating with far smaller reserves and under an IMF program, has been forced to allow a more flexible exchange rate, leading to a 12% depreciation year-to-date for its currency. India's large reserve buffer allows the RBI to take a more assertive stance.

Inflation and Outflows Complicate Policy

The RBI's policy maneuvering comes against a complex global backdrop. The ongoing conflict in West Asia has pushed up energy costs, contributing to a global slowdown and stagflationary pressures, according to a recent S&P Global Flash PMI survey. In India, this has aggravated domestic inflation and widened the trade deficit, which grew to 3.1% of GDP in the 2025-26 fiscal year from 2.6% the prior year.

While India's consumer price inflation (CPI) for April remained below the central bank's 4% target, wholesale price inflation more than doubled to 8.3%, indicating that higher input costs for manufacturers are likely to be passed on to consumers. This puts the RBI in a difficult position, as hiking interest rates to defend the currency could stifle economic growth, while not doing so risks further capital flight and imported inflation. Malhotra acknowledged the balance of payments situation requires "coordinated attention" from the government and the central bank.

This article is for informational purposes only and does not constitute investment advice.