Rupee Not Overvalued: RBI Signals Gradual Depreciation

RBI governor’s message on valuation

Reserve Bank of India Governor Sanjay Malhotra has said the rupee is not overvalued and may, in fact, be undervalued after its recent depreciation against the US dollar. In an interview with Mint, Malhotra linked this view to both nominal levels and the REER (real effective exchange rate). His remarks come at a time when the currency has been under sustained pressure and markets are closely tracking how the central bank balances flexibility with stability. The framing matters because it signals the RBI is less focused on defending a particular level and more focused on the pace and manner of the move.

“Not overvalued” and possibly undervalued in REER terms

Malhotra’s assessment was explicit: “With the recent depreciation, it would be reasonable to think that rupee is not overvalued. If anything, one could argue that rupee has become undervalued, both in nominal as well as in Reer terms.” That statement effectively pushes back against the idea that the rupee’s weakness is purely a valuation correction from an overstretched starting point. It also aligns with the broader view, cited in the material provided, that a developing economy with higher inflation than trading partners can see moderate depreciation over time.

Why gradual depreciation is being framed as acceptable

The RBI’s communication, as described, draws a line between a managed, gradual weakening and an abrupt fall that destabilises expectations. Moderate depreciation over time is described as “mathematically expected” for a developing economy running higher inflation than its trading partners. The text also notes an expectation that “the rupee will be weaker in 2035 than it is today,” while emphasising that such a path is manageable if disorderly moves are avoided. The operational takeaway is a tolerance for trend moves, coupled with an intolerance for panic.

Pressure since late February amid Middle East tensions

The rupee’s recent stretch of weakness is tied in the article to geopolitical risk and risk-off moves in global markets. The currency has remained under pressure since the Middle East conflict erupted in late February. Over that period, it fell nearly 6% and hit multiple record lows against the US dollar. The rupee is described as inching closer to the 97-mark against the greenback as tensions involving the US, Israel and Iran weighed on markets.

RBI strategy: allow trend moves, prevent panic

Economists cited in the prompt argue that preventing panic matters more than defending a symbolic exchange rate number. The RBI is described as increasingly allowing the rupee to weaken gradually as oil prices remain high, while still remaining alert to sharp, fear-driven declines. The central bank “appears comfortable with the rupee weakening slowly, but not collapsing suddenly” in a way that triggers broader financial market stress. Put simply, the strategy being attributed to the RBI is nuanced: allow gradual depreciation, but prevent panic.

Measures under consideration as volatility rises

As the rupee’s decline gathered pace, the RBI was said to be considering a range of measures to stabilise the currency, according to people familiar with the matter. One such option referenced is a programme that could potentially mobilise as much as USD 50 billion this time, compared with around USD 30 billion raised earlier. People familiar with the RBI’s thinking also said policymakers believe the depreciation has been sharper than initially expected. The prompt adds that preventing further weakness has become the central bank’s immediate priority, with policymakers prepared to use all available options if needed.

Rate differential and the bond flow channel

The material also points to the interest rate channel as one potential support for the currency. A rate hike could support foreign bond inflows by increasing the yield gap between India and the United States. That gap is described as having fallen to its narrowest level in more than ten years, which can reduce India’s relative yield appeal for global investors. While no decision is stated, the mention highlights the trade-off policymakers face when currency stability concerns intensify.

What REER data is indicating

Separate from the governor’s comments, the provided text cites RBI data indicating that India’s REER fell to 92.72, “quite below” its long-term average, implying undervaluation in historical terms. It also states the 6-currency REER fell to 89.61, described as a record low. The reasons attributed for the drop include Middle East tensions, an oil price spike, FII outflows, and rising import demand. The same segment notes the rupee is down about 4.5% this year and has touched around ₹95 per dollar levels, alongside a reference to an RBI estimate of ₹94 per dollar.

How economists describe RBI’s currency management

Madan Sabnavis, Chief Economist at Bank of Baroda, is quoted describing the market perception that the RBI may let the rupee “find its own level,” partly because depreciation can support exports and acts as a natural barrier to imports. But he also points out that a weaker currency makes imports more expensive, which matters in an economy dependent on certain imports, including capital goods. In the transcript excerpt, he also describes the RBI’s stated objective as managing volatility, with the rupee being market-determined and intervention aimed at preventing unhealthy swings and extreme misvaluation.

CEA view: undervaluation could attract long-term investors

The prompt also includes comments from India’s Chief Economic Adviser, V. Anantha Nageswaran, who said the rupee is “fundamentally undervalued,” and that current levels could draw investors. He added that for long-term investors, the rupee’s current valuation provides an attractive entry point. This view supports the broader theme running through the material: weakness is being described not as a valuation excess, but as a move that may have overshot on stress factors.

Key numbers and signals to watch

Market impact and why the distinction matters

For markets and companies, the key distinction is between a controlled depreciation and a disorderly drop. A gradual weakening can improve export competitiveness and discourage some imports, but a sharp fall can quickly transmit into imported inflation and broader risk aversion. The text explicitly flags that if depreciation extends further, inflation and growth could be impacted. Against that backdrop, the RBI’s emphasis on volatility management, along with talk of multiple stabilisation tools, is aimed at keeping currency moves from becoming self-reinforcing.

Conclusion

The RBI governor’s comments position the rupee’s recent depreciation as having potentially pushed the currency into undervalued territory, including in REER terms. At the same time, the broader message in the material is that the central bank is prepared to tolerate gradual depreciation while resisting sharp, panic-driven moves. With the rupee nearing the 97 per dollar mark and policymakers described as weighing multiple options, investors are likely to track the RBI’s next steps and any measures intended to stabilise the currency as global uncertainty persists.