Reserve Bank of India (RBI) Governor Sanjay Malhotra stated on Wednesday that the Indian rupee may be undervalued following its recent depreciation against the US dollar. Speaking at an event in Mumbai, Malhotra attributed the currency's decline primarily to external factors, including the strengthening of the US dollar and global economic uncertainties.
Global Factors Driving Rupee Weakness
The governor highlighted that the rupee's movement is largely influenced by international developments rather than domestic fundamentals. "The recent depreciation of the rupee is more a reflection of global factors, particularly the dollar's strength," Malhotra said. He added that the RBI remains vigilant and intervenes in the foreign exchange market only to curb excessive volatility, not to target any specific exchange rate level.
Impact on Trade and Inflation
A weaker rupee makes imports more expensive, potentially stoking inflation. However, Malhotra noted that the central bank is monitoring the situation closely. "We have adequate forex reserves to manage any undue pressures," he assured. The RBI has been actively intervening in the forex market to smoothen sharp movements, selling dollars when necessary to prevent a disorderly depreciation.
Economists have mixed views on the rupee's fair value. Some argue that the currency is now undervalued by about 5-7% based on real effective exchange rate (REER) calculations. The REER, which measures the rupee against a basket of currencies adjusted for inflation, has shown a decline, indicating that the rupee is weaker than its historical average.
RBI's Stance on Currency Management
Malhotra reiterated that the RBI does not have a fixed target for the rupee and allows market forces to determine its level. "Our policy is to ensure orderly market conditions. We do not manage the exchange rate with a view to gaining competitive advantage," he said. The governor also emphasized that India's macroeconomic fundamentals remain strong, with robust GDP growth and moderating inflation providing support to the currency in the medium term.
The rupee has depreciated around 8% against the US dollar so far in 2025, making it one of the worst-performing Asian currencies. This has raised concerns among importers and businesses with foreign currency debt. However, exporters stand to benefit from a weaker rupee, as their goods become more competitive in global markets.
Future Outlook
Looking ahead, the trajectory of the rupee will depend on global monetary policy, particularly the US Federal Reserve's interest rate decisions. If the Fed continues to hike rates, the dollar could strengthen further, putting additional pressure on emerging market currencies like the rupee. Conversely, if the Fed pauses or cuts rates, the rupee may recover some lost ground.
Malhotra concluded by stating that the RBI remains committed to maintaining financial stability and will use all available tools to manage any external shocks. "We are prepared to act as needed to ensure that the rupee's movements do not disrupt the broader economy," he said.
