Governor Malhotra Analyzes Rupee Underperformance Amid Resilient Economic Indicators

Central Bank Challenges Exchange Rate Narratives

In a rare departure from the typical reticence of central bank leadership, Reserve Bank of India (RBI) Governor Sanjay Malhotra has characterized the Indian rupee as undervalued. Speaking across multiple high-level engagements, including a July 26, 2026, interview and a June 5, 2026, press conference, Malhotra noted that the currency's current market price does not align with its intended strength. He specifically pointed to the Real Effective Exchange Rate (REER) as evidence that the rupee is not overvalued, suggesting that by several metrics, it has dipped below its fair value.

The Governor clarified that the RBI remains committed to a market-determined exchange rate and does not defend a specific price ceiling or floor. Instead, the central bank intervenes only to mitigate chaotic volatility. The recent 5.8% year-to-date depreciation of the rupee appears driven by external pressures rather than internal weakness. These factors include geopolitical instability, surging crude oil prices, and significant capital outflows as foreign portfolio investors exit emerging markets for the safety of a stronger U.S. dollar.

The Divergence Between Growth and Currency Value

The RBI’s assessment rests on a widening gap between India’s domestic output and global market sentiment. While the rupee faces downward pressure, the underlying Indian economy showcases several points of strength:

• Consistent annual growth exceeding 6%, maintaining India's status among the world's fastest-expanding major economies.
• Foreign exchange reserves sufficient to cover 11 months of imports.
• Moderating inflation levels and a stable external debt position despite global headwinds.

Understanding the REER Metric

Governor Malhotra’s reliance on the Real Effective Exchange Rate (REER) provides a more nuanced view than nominal exchange rates against the U.S. dollar. While the nominal rate tracks simple currency pairs, the REER adjusts for inflation differences against a basket of currencies from India’s primary trading partners. This calculation serves as a barometer for trade competitiveness and purchasing power. When the REER suggests undervaluation, it implies that the rupee's loss of value has outpaced the relative price changes between India and its competitors.

Maintaining this balance is a delicate exercise for the RBI. While a stronger rupee reduces import costs and cools inflation, a weaker currency provides a competitive edge to Indian exporters. By labeling the rupee undervalued, the Governor is signaling that current market fluctuations likely reflect temporary global shocks rather than a fundamental decline in India's economic health.

Source: The Hindu — Home